The Bank of Japan’s monetary policy tightening last week has triggered a wave of criticism after it helped set off a historic plunge in Japanese stocks and contributed to global market turmoil — likely putting any plans for further rate hikes on ice.
“The BOJ needs to be humble about economic data and the markets,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute and a former BOJ official. “The fact that the BOJ raised interest rates in the face of poor economic statistics shows that it did not pay attention to data.”
Governor Kazuo Ueda last week repeatedly stressed the BOJ decided to increase rates based on economic and inflation data showing that developments were in line with previous expectations. He also said rates would keep rising as long as that trend held.
But the worst equity sell-off in decades now has analysts beginning to think the central bank pulled the trigger too early. Many are changing expectations.
“It was a poorly timed interest-rate hike,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “The BOJ will have to wait and see whether the US economy will enter a recession or a soft landing before it can make the next move. At the very least, a September, October rate hike is now off the table.”
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The BOJ’s July 31 decision helped the yen rebound from near a multi-decade low, something that had weighed on Japanese consumers’ purchasing power. But now the currency’s rapid surge — it’s up about 8% against the dollar in the past week — is hammering earnings prospects for exporters, causing equities to tumble.
And that’s in a context in which the BOJ has ended its program of purchasing exchange-traded funds, a tool that officials might otherwise have deployed to keep stocks from free-falling.
Until the market downturn the past few sessions, most economists had expected another BOJ rate hike by the end of the year, following hawkish language from Ueda. Last week, 68% in a Bloomberg survey had expected the policy rate to hit 0.5% by year-end, from the current 0.25%.
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The yen has lost some ground against the dollar Tuesday, weakening more than 1%, while the benchmark Topix index has begun trading with a strong rebound.
Strategy shift
Japan’s central bank had, going back to Ueda’s predecessor, Haruhiko Kuroda, pursued a very gradual course of withdrawing monetary stimulus — widening the tolerance band for its 0% 10-year yield target before finally abandoning it, and scaling down bond purchases.
That magnified the appearance of a shift for some observers around the world when the BOJ last Wednesday both hiked its benchmark to the highest in more than a decade and slashed bond buying.
Some speculate that political pressure was involved.
“I can’t help but think that political factors were behind the decision,” said Atago. “I have no choice but to interpret this as a sign of communication between politics and the BOJ on how to deal with the weak yen.”
Atago said consumption and production data were too weak to justify a rate increase. Consumer spending in real terms has shrunk in each of the four quarters to March as inflation ate into people’s purchasing power.
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On Tuesday, data showed consumption remained weak in June while a rise in summer bonuses helped real wages to turn positive for the first time in more than two years.
Two senior politicians in Japan’s ruling party made the rare move of weighing in on BOJ policy last month, in the run-up to the decision. Heavyweight Toshimitsu Motegi said the BOJ should more clearly show its intention to normalise policy, while cabinet member Kono Taro spoke out against the weak yen while discussing the BOJ.
Political calculus
The comments showed how the political calculus has shifted notably over time. Back during the era of deflation, politicians had put pressure on the central bank to ease policy, and to hold off on tightening. Former Prime Minister Shinzo Abe publicly said in 2014 that the government had opposed the end of quantitative easing in 2006 and the scrapping of zero interest rate policy.
Speaking to reporters after Monday’s historic market moves, Finance Minister Shunichi Suzuki said that he’s watching the stock market “with strong interest”, and that the government needs to be calm in judging the situation.
Still, others are supporting the central bank’s latest decision, and attribute the recent market turmoil more to US data and the Federal Reserve’s decision not to cut rates.
The BOJ didn’t move too soon as “normalisation is the right thing to do,” said Jesper Koll, expert director at Monex Group Inc. and a long-running cheerleader for the nation’s equities. “Hiking rates in Japan was not the problem, but not balancing the rate hike with dovish language was a negative surprise.”
Jin Kenzaki, Societe Generale’s head of research for Japan and chief Japan economist, said that if the market’s view over the probability of a US recession calms down, the BOJ is likely to hike again around December. Either way, the current market freefall has been triggered more by developments in the US, he said.
“If the market’s correctly pricing in a US recession, there’s of course a possibility that the BOJ decides against raising rates again this year.”
Chart: Bloomberg
