Economic Outlook
Japan to stay focused on an inflationary future
What is the new direction from Bank of Japan? We explore possible policy changes and next steps at the recent UBS Global Macro Forum in June in Singapore.
Continuity is the key for Kazuo Ueda, the Bank of Japan’s (BOJ’s) new Governor as of April 2023, with a focus on stimulating inflation in the country in a sustainable and stable way.
The case for this is overwhelming, said Masazumi Wakatabe, Professor of Economics at Waseda University, given current and future prospects for inflation and the economy, both in Japan and the rest of the world.
“Right now, the correct approach [for Japan] is to get behind the curve, to achieve the 2% inflation target in a sustainable and stable manner,” explained Wakatabe, also a Former Deputy BOJ Governor, who was speaking at the UBS Global Macro Forum in Singapore in early June.
The good news is that the inflation rate is rising. However, it is not yet at US or Eurozone levels, in part due to a mix of factors in Japan that include less supply disruption, weaker levels of demand and a deflationary mindset that has existed for the past two decades.
Inflation in Japan is still defined by its cost-push nature, explained Wakatabe, although he pointed to some encouraging positive signals, such as the hike in nominal wage rates and equity market developments.
Learning from past mistakes
Learning from past mistakes
While there are questions for the new BOJ regime about when it might change its yield curve control (YCC) strategy, there is no magic metric for gauging inflation to be consistent with its target level in a sustainable and stable manner.
There are also mixed messages when assessing inflation expectations. Views differ over the outlook, for example, between businesses, households and the wider financial market, said Wakatabe.
There is also some debate over nominal wage growth, but wage-price dynamics haven’t returned in any meaningful or consistent way.
Against this backdrop, the BOJ’s strategy is to move from what Wakatabe describes as a “bad, deflationary equilibrium” to a mildly inflationary scenario.
As part of this plan, the BOJ has engaged in various monetary policy innovations since 2013. Yet YCC should be considered a tool, not a strategy, explained Wakatabe. “The BOJ might change the YCC if it feels confident that the change will not jeopardize the strategy.”
The BOJ also has a history of policy mistakes, he added, at various points between 1990 and 2009.
A rocky roadmap
A rocky roadmap
Speaking at the Forum to Masamichi Adachi, Chief Japan Economist for UBS, Wakatabe identified three main issues for Japan in achieving steady inflation:
- Short term, there are concerns over the potential for recession in advanced economies like the US, and the subsequent impact of current banking stress on the economies. There are also worries over the impact of a possible China slowdown on the Japanese economy.
- Medium term, there is an emerging question about whether central banks globally should revise their 2% target inflation rate upwards.
- Longer term, the potential for the age of higher inflation needs to be considered, based on whether secular stagnation will come to an end.
Wakatabe reviews a narrative of the fear of secular stagnation, creating low inflation – or even deflation – accompanied by low growth and low interest rates. This has been the case in the wake of the rise of China and other emerging markets, globalization, a carbon economy and a large inflow of labour, he explained.
On the other hand, there is an emerging narrative that a higher inflation environment, supported by higher growth and higher rates, has the potential to emerge amid conditions such as convergence in growth, a China slowdown, deglobalization and fragmentation.
In reality, however, Wakatabe backs the former scenario, emphasizing that premature tightening remains a bigger risk for Japan than an overheating of the economy.
Our inaugural Global Macro Forum in Singapore brought together institutional investors, corporate leaders and policy makers to discuss the macroeconomic outlook and trends impacting the region.
