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Japans Cheap Money Era May Be Ending
31.01.17 13:19 Economics
By Anthony Fensom

ices dipped by 0.3 percent, the first annual fall under BOJ Governor Haruhiko Kuroda and despite massive monetary stimulus.

However, overall consumer prices rose by 0.3 percent in December, with analysts suggesting a weaker currency and rising oil prices could contribute to stronger inflation in 2017.

“Core CPI will likely return to gains as early as February, and may reach 1 percent around October,” Hiroaki Muto, chief economist at Tokai Tokyo Research Center, told Bloomberg News, adding, “It’s all about energy prices this year.”

Okasan Securities chief economist, Nobuyasu Atago, told the financial news service that “CPI [consumer price index] is at the turning point – it’s gradually gaining momentum,” although he warned about the need for stronger wages growth and consumer spending to ensure a sustainable upturn.

The BOJ’s latest forecasts suggest inflation will not reach its 2 percent target until fiscal 2018, despite having introduced the price stability target in January 2013. Along with zero interest rates, the central bank has conducted both quantitative and qualitative monetary easing (QQE) to reach its goal, including currently buying 80 trillion yen ($695 billion) worth of Japanese government bonds a year, along with exchange-traded funds and other assets.

Analysts suggest the BOJ will be in no hurry to change policy at its upcoming policy meeting later this month. Yet stronger recent economic data could prompt an upgrade to its forecasts, according to Japan’s Nikkei.

In December, the BOJ upgraded its outlook for the national economy for the first time in 19 months, while Kuroda suggested recently that gross domestic product (GDP) could expand by around 1.5 percent in fiscal 2016 and 2017, above previous forecasts.

“Trumpnomics” has also lifted confidence in Japan’s outlook, with the prospect of U.S. corporate tax cuts and increased infrastructure spending along with rising U.S. interest rates pushing the dollar higher and the yen lower. U.S. long-term interest rates surged from 1.8 percent before the presidential poll to 2.6 percent in December, boosting the dollar and pushing the yen down from around 101 to 119 against the dollar.

Yet concerns over Trump’s protectionist trade policies and the prospects of a U.S.-China trade war have seen the yen subsequently rebound to as high as 112. Any global instability could see the yen gain further ground due to its status as a “safe haven” currency, although not all analysts are fearful.

“About 14 percent of Japanese company profits come directly from North American-based production and so should benefit from Donald Trump’s promise to dramatically cut U.S. corporation tax rates,” GaveKal Research analyst Neil Newman said.

“Japan, which sells about 45 percent of its offshore production in the U.S., is well placed to deal with a more ‘de-globalized’ world.”

An early beneficiary of the new environment has been Tokyo stocks, which have risen by nearly 2 percent since the new year, buoyed by the prospect of stronger exporter profits due to the weaker yen. This has encouraged analysts including those from Citi, Morgan Stanley, and Nikko Asset Management to project a bullish year for Japanese share prices, with estimated price gains of up to 16 percent.

Interest Rate Hike?

An ongoing recovery in global demand, rising inflation, and improved corporate governance under Abenomics have prompted Nikko Asset Management (Nikko AM) to suggest the Year of the Rooster could be the year the BOJ’s easy money era finally nears an end.

“After almost 10 years of zero interest rates, the Bank of Japan may now be looking to increase interest rates to produce inflation,” Nikko AM’s chief strategist Naoki Kamiyama said.

“We believe that a reasonable rate rise would be good for the Japanese economy, as it would help to strengthen the banking sector through increased lending, and reduce outflows from investors looking for higher yields overseas.”

WisdomTree Japan’s chief executive Jesper Koll told Pacific Money that the BOJ could even achieve its inflation target by year-end, helped by rising wages and recent fiscal stimulus.

“The overall policy mix changed last August, where you had Prime Minister Abe commit, ratified by Cabinet and Parliament, they will spend 28 trillion yen ($243 billion) over three years on additional fiscal spending, around 5 percent of GDP. So fiscal policy is now the driver of stimulus, whereas it used to be a drag,” he said.

“Two weeks after Abe committed to the [spending plan], the BOJ changed its policy to no longer targeting the quantity of money but keeping the entire yield curve at zero for the foreseeable future. So Japan now has fiscal dominance, with monetary policy back to targeting interest rates.

“And if I’m right and this year we see an acceleration in overall economic growth and an acceleration toward the 2 percent inflation target, by late summer or early autumn there will be discussion about the BOJ increasing its interest rate target, say to around 0.5 percent by year-end.”

However, the prospects for Japan’s first rate rise since 2006 could still be hit by a range of financial market risks, which in the BOJ’s latest assessment included a potential further slowdown in China, the impact of higher U.S. interest rates on global financial markets and the consequences of Britain’s exit from the European Union.

Yet should the BOJ finally achieve its target, Japan’s cash-hoarding companies and households might start spending again.

“If Japan’s CPI really hits 2 percent and inflation kicks in, as Kuroda has been saying, people will naturally withdraw money from their bank deposits and move to investment,” Nomura Securities chief executive Koji Nagai told the Financial Times.

Kuroda’s five-year term as governor expires next April, but commentators suggest the 72-year-old may be awarded the opportunity to see through his policy goals with another term in office.

“Kuroda is doing a terrific job… All of the efforts we have made so far would be in vain if we have someone with different thinking,” Abe adviser Etsuro Honda told Bloomberg News.

Japan analyst Naomi Fink said any upturn in inflation would be a major boost for Abenomics.

“If it actually happens, Abe will get a huge boost because a lot of his reform policies will look more possible. It opens the door to such things as labor reform, social security reform, and privatization,” said Fink, chief executive of Europacifica Consulting.

Fortunately for both Abe and Kuroda, the likely prospect of extended terms in office through to the end of the decade and even beyond gives them more time to achieve their targets. But after two decades of deflation and four years of Abenomics, both will be hoping that they finally have something to crow about on prices in the Year of the Rooster.

 
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