June 17, 2022 | 13:37
BoJ: Me, Myself and I
There is nothing wrong with standing up for what you believe in, or being brave enough to be different from the rest of the crowd. And the ‘cool kids’ are in full tightening mode. This week saw the biggest hike by the FOMC since 1994 at 75 bps; a steady 25 bp hike by the BoE, with a declaration that it will “act forcefully” if needed; a fully expected 50 bp hike by the central bank of Brazil and a 300 bp jump in Argentina; and, a shock 50 bp hike by the SNB, its first since 2007.
But there was one brave soul, the Bank of Japan, which, to the surprise of no one, opted to stand its ground against the tide and maintained its highly accommodative stance on Friday, aka “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control”. That is, it kept its policy rate at -0.1%, will continue to peg 10-year JGB yields at around 0%, and keep buying assets (ETFs, J-REITs, and corporate bonds). And, Governor Kuroda also said that while he doesn’t see the need for further easing now (tell that to the huge dove Kataoka Goushi, who has voted for more easing since he joined the board way back when), he was ready to ease further if needed. So why the different stance?
The economy is still weak (shrank in Q1) and still recovering from the pandemic and supply shortages. Toyota, for example, announced again that it will be suspending domestic production due to the limited availability of semi-conductors. But, Japan is not seeing the same kind of inflation pressures as the rest of the world. Granted, core CPI (ex. fresh food) hit the 2% target (first time in seven years) recently due to higher energy costs, yet the BoJ expects it to decelerate as the “positive contribution of the rise in energy prices to the CPI is likely to wane”. But let’s say energy prices stay elevated… with the pronounced weakness in the Japanese yen (around ¥135)… that deceleration may have to wait. Or, more of these high energy prices filter through into other areas.
Bottom Line: The BoJ should have backed away from these pandemic-era policies long ago. It doesn’t need to raise rates 75 bps, or even 25 bps for that matter. Change the forward guidance a little, or lift the cap on 10-year yields. But saying that tightening now is “premature” runs the risk of an even weaker JPY, which will hurt households more as prices rise even further, which will in turn hurt economic growth. There is nothing wrong with changing the narrative a bit, just to soften things a little.