Is it that time of year in Tokyo already? The annual obsessing among financial journalists about the Bank of Japan escaping from its quantitative-easing rabbit hole is well underway.
The impulse is understandable. Virtually every other monetary authority is putting some distance between themselves and sub-zero stimulus. And clearly, the small army of reporters covering the zombified BOJ are desperate for a story.
Yet this year’s debate is bursting onto the business pages with unusual fervor. Over the weekend in Buenos Aires, where Group of 20 officials met, BOJ Governor Haruhiko Kuroda played coy about whether next week’s policy meeting might be the one. Don’t hold your breath.
Tweaks are possible at the two-day gathering ending July 31. Perhaps even significant ones. But the idea that Kuroda will be withdrawing stimulus on a sizable scale is betrayed by data trends and the Trumpian storm clouds rolling Japan’s way.
Inflation, for example, is perhaps halfway to Tokyo’s 2% target – and that’s being generous. Generalized wage gains have been too modest and too sporadic to boost consumer or business confidence. And Donald Trump’s fast-escalating trade war is a clear and present danger to Prime Minister Shinzo Abe’s reflation program.
Earlier this month, the US president slapped 25% levies on $34 billion of Chinese goods. Trump is threatening to target as much as $500 billion of goods in the weeks ahead. That would devastate Abenomics. China is by far Japan’s main trading partner. On top of that, Trump is floating a 25% tax on auto imports, making Toyota, Nissan and Honda even less likely to fatten paychecks. Abe is relying on Japan Inc’s biggest names to catalyze a virtuous cycle of rising consumption.
Any big move by the BOJ to take its foot off the gas would further imperil growth momentum. Prior to Japan contracting 0.6% in the first quarter, it had been enjoying its longest expansion since the 1980s. Slowing that momentum would be an economic own goal. And any sudden withdrawal from the stock market, via exchange-traded funds (ETFs), could precipitate a powerful sell-off that saps sentiment.
Yet some recalibrating seems in order. Ten-year yields recently spiked to the highest levels in two years, toward 1%, amid speculation the BOJ might curb bond purchases. More likely, the BOJ will step up yield-curve management efforts. That could mean increasing the difference between short-and long-term interest rates to help banks gin up profits. Or, the BOJ could tolerate higher 10-year yields and instead target the five-year maturity range with its quantitative easing.
ETF tweaks also are possible. Kuroda’s team is uncomfortable owning such large blocks of the stock market. By the end of 2017, the BOJ held more than 75% of the ETF market. Its hoarding of government bonds has deadened trading volume. Might the Nikkei and Topix indexes also find themselves in moral hazard territory – warped beyond recognition?
The most likely explanation for what’s going on is communication. As Yianos Kontopoulos of UBS explains, central banks that cut rates to zero and beyond are in uncharted territory from a market-signaling standpoint. The slightest, tiniest hint the BOJ is feeling better about the economy sends the yen surging, yields skyward and analysts scrambling to reassess their base case on Japan.
In reality, Japan is more trapped in QE-land than traders realize. Any re-rating of currencies and yields could reanimate the deflationary spirits Kuroda spent five years struggling to defeat. “It’s quite likely the Japanese want to extricate themselves today, but we’ve found repeatedly that’s going to take much longer for us to get the signals and the actions to get there,” Kontopoulos told Bloomberg.
From an interest-rate differential standpoint, there’s little reason for the yen to rise, says Esther Reichelt of Commerzbank. That is despite Trump’s intensifying attacks on officials he sees as manipulating currencies – from China to Europe. Presumably Japan, too. Trump has even taken to bashing his own Federal Reserve leader, Jerome Powell, on Twitter, a not-so-veiled ploy to slow the rise in short-term US rates.
At the same time, says Nicholas Smith of CLSA Japan, the BOJ is “not showing signs of tapering ETF buying.” It’s just the opposite, he claims, given that Kuroda’s team is actually 11% ahead of target year-to-date for stock purchases.
Markets will have better answers to questions circling around the BOJ come next week. If recent drama communicates anything to Kuroda, though, it’s that the BOJ will do more talking of exits than finding them in the months ahead.