Issue:
May 2024 | Deep Dive
The Bank of Japan’s surprise rate rise has divided opinion over what comes next
Financial markets have chosen to put an optimistic interpretation of the Bank of Japan’s move on March 19 to abandon most aspects of its long-standing unconventional monetary policy. But they may have mistaken the true reasons behind the central bank’s “surprise" action.
Many analysts and commentators have seen the BoJ’s decision to end its framework of quantitative and qualitative monetary easing with yield curve control, and negative interest rates, as a signal that the it is returning to the fold of inflation fighters.
The central bank will also cease buying Japanese equities in the form of exchange traded funds or ETFs, as well as real estate investment trusts (REITs). But, for the time being, it will continue buying up to ¥6 trillion a month of Japanese Government Bonds (JGBs).
Markets seem to have assumed that means that the BoJ and the Japanese government are confident that the world’s fourth-largest economy has finally shaken off decades of mild deflation and stagnant growth, and that Japan is on the move again.
Yet this was not the consensus among a panel of economic and financial experts at a March 28 Deep Dive event at the FCCJ, where uniform assumptions and spin were refreshingly absent from the debate.
Paul Sheard, former S&P Global Vice Chairman and Research Fellow at the Harvard Kennedy School, acknowledged that the BoJ’s move to fractionally raise short-term rates to focus on the overnight call rate
and end yield curve control represented a “framework shift”.
But he challenged the view that this historic move could soon be followed by further rises in short-term rates. The BoJ will very like continue to move cautiously, with little change in short-term rates between now and the end of next year, he said.
The BoJ shift came as a surprise to some market participants. Former BoJ Policy Board member Sayuri Shirai suggested that the central bank mighty have rushed its decision while the inflation outlook in Japan still appeared positive.
“We cannot say that two percent inflation (the BoJ’s target level for consumer prices) in Japan is sustainable now, or that a virtuous cycle has been established between wages and prices,” she said.
The BoJ could have waited until June, Shirai suggested, in order to establish more clearly that the results of the shunto spring wage offensive justify confidence that wages in Japan are on a sustainable upward trend and that inflation expectations are becoming entrenched.
Overall consumer price inflation is currently running at around 2.8%, she noted, but this is due mainly to upward spikes in food and utility prices, which may be transient. When these factors are removed, she added, underlying inflation is closer to 1.6%.
The rationale behind the BoJ move was challenged by Richard Katz, an economist and author of The Contest for Japan’s Economic Future (Oxford University Press), who argued that demand for credit in Japan’s economy was too weak to justify interest rate hikes.
When adjusted for inflation, real wages in Japan have been consistently falling for the past six years, Katz said, while “consumption today is lower than it was 11 years ago. People are having to dig into savings to maintain consumption. The BoJ rush to move now does not make sense.”
There may have been other motives behind the BoJ move, Katz added. “The yen is much weaker now than would be the case traditionally, based on interest rate differentials. So, one has to wonder whether that might have pushed the BoJ to do something about rates.”
Global strategist Naomi Fink of Nikko Asset Management in Tokyo had a different view. “I’m not expecting Japan’s economic growth to shoot up to 5% [it is forecast by the IMF to be nearer 1% in 2024] but I do think the signals of a virtuous circle between wages and prices is underway,” she said.
Anthony Rowley is a columnist and contributor for the South China Morning Post.
