When Does Godot Get to Japan?
Japan’s cherry blossom season is about to begin, but foreign investors are focusing their hopes on what they believe will be a far rarer sight. There’s a good probability that the Bank of Japan will announce next week that it is ending its negative interest rate policy and putting an end to the nation’s deflationary period, if the rumors are to be believed.
We have recovered from similar situations in the past, but to no avail. (Read Daniel Moss’ piece in Bloomberg Opinion for an examination of the Japan story.) However, increasing inflation has made it possible to abandon the unorthodox monetary strategy known as Yield Curve Control (YCC), so this time, Godot could show up and Charlie Brown might kick the football. Some people really think that the news will be made during the meeting next week, although April seems like a better option. The pay talks this year, dubbed the “spring fight” or “shunto” because they typically conclude around cherry blossom season, were perhaps the last factor that may derail the central bank’s intentions. According to recent sources, base pay increases for workers are expected to total around 3.5% higher. This should boost real family incomes, support domestic consumption, and cause inflation to peak around the BOJ’s goal.
The primary counterargument is from the most recent inflation figures, which indicate a rapid decline after the headline’s 4% high. That might delay the BOJ until next week.
Declining Consumer Prices Could Calm Expectations of BOJ Rate Increases
Expectations for easing in the US and the eurozone stand in stark contrast to a likely increase. There isn’t much discussion over Japan’s monetary policy’s unconventionality. Having stuck to this position despite the pandemic’s uncertainties, concerns about how an increase might affect the economy seem reasonable. Japan’s stock markets have been booming, as seen by the record runs seen by the Nikkei 225 and Topix. Finally, the Nikkei smashed a high record that had persisted since the last day of 1989.
After the Japanese equities bubble broke in early 1990, the central bank’s policies diverged from the rest of the globe. Since then, the BOJ has either remained stationary or carefully followed the Federal Reserve’s cycle of rate hikes in 2000 and 2006 as the economy sank into deflation. Its rates have remained remarkably low. More lately, the disparity has reached an extreme. In 2016, the BOJ implemented negative rates and YCC after China’s devaluation. The rates of the eurozone were likewise set at zero at that time. However, Japan has stayed below zero for the last two years, while other places have recovered to a state resembling normalcy:
Japan Parts Company With Europe
ECB hikes rates aggressively as Japan sticks to its guns
Citi Research’s Dirk Willer and his team note that in the two cases the BOJ followed the Fed’s cue, it only hiked when the Fed was on hold — and as a result, those cycles were short-lived. Then, as now, it needs to monitor what other central banks do:
History would therefore suggest that, once more, the BOJ will not get all that far in its cycle, even though it will be clearly easier to hike during preemptive Fed cuts, as opposed to Fed cuts driven by recession fearsHowever, even untimely Fed a decline will have an impact on the BOJ, in part because they will lessen the upward pressure on the USDJPY, which will in turn lower inflation pressures in Japan. turn will feed through to wages.
Ahead of the Fed’s easing cycle, the yen will probably see less pressure, given it is now trading at record lows and is at its lowest point for the effective exchange rate.in 33 years, and for the real effective rate since 1970.
Yen Near Record Low Ahead of Key Bank of Japan Meeting
After accounting for inflation, the yen is cheaper than it was in 1970
Although this may not be good news for exporters, Tom Holland of Gavekal contends that the worry could have been overblown. He thinks there will be a direct translation impact on the yen worth of Japan Inc.’s foreign profits if the yen enjoys from its present levels. Then there’s the impact on Japanese stocks. Generally, traders are used to assuming that a weak yen will mean stronger stocks and vice versa. It also prompts Japanese equity investors to park money outside the country. Could a stronger yen reverse this? Holland argues that the “reasonably close correlation between the Topix and the yen” over the last 20 years might not necessarily be a guide:
Notably, when the yen strengthened by 35% between late 1998 and the end of 1999, the Topix climbed 36% in yen terms, for a US dollar gain of 49%. Similarly, the yen and the Topix also gained in tandem in the early 2000s on hopes that financial sector reform would boost growth. Much the same could happen again, especially if yen appreciation triggers large-scale repatriation of foreign assets by Japanese institutions.