Japan: Continuing to ease
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
Developed economies around the world have been on a lengthy recovery since the financial crisis 10 years ago. The US Federal Reserve bank, the Bank of England and the European Central Bank have now all started to reverse their loose monetary policies. Japan is the exception. With a rapidly ageing society, poor demographic trends have kept the Bank of Japan (BoJ) in check.
Like other leading central banks, the BoJ introduced ultra-easy policies to shore up domestic economic growth after the crisis. Japan’s central bank also initiated its own programme of quantitative easing on a huge scale more than five years ago. Two years later it added an explicit price target for Japanese government bonds and introduced negative short-term rates (effectively applying a cost to savers) and pledged to keep the 10-year yield at “around 0%” to encourage spending. This policy is referred to as zero interest rate policy or ZIRP.
The chart below puts into context the extent to which Japan, relative to its GDP, has used quantitative easing compared to the US, UK and Europe.
Central Banks’ Balance Sheets as percentage of GDP
Source: Bloomberg, August 2018
Despite this ultra-accommodative policy, and improvements in economic growth, hitting the BoJ’s policy target of 2% inflation has been elusive. The chart below highlights a decade of deflation suffered in Japan, with prices barely rising despite all efforts to get them higher.
Japanese Core Inflation, Target Inflation and Annual Real GDP
Source: Bloomberg, August 2018
At Tuesday’s policy announcement, BoJ governor Haruhiko Kurdo confirmed no major adjustments to its current ¥80trn a year quantitative easing programme. For the first time, they provided forward guidance, stating that current interest rates would continue for “an extended period of time”, crushing thoughts of a move towards higher rates. Mr Kurdo stated that the BoJ wanted to achieve 2% inflation as soon as possible but cautioned that this target might not be reached before 2021.
With the BoJ continuing to ease, this should in theory, extend the “carry trade” whereby investors borrow in yen to reinvest in higher yielding currencies or markets abroad. This remains a high-risk strategy for even the most sophisticated investor. However, an extension of cheap liquidity should help maintain liquidity levels not just in Japan but around the world.
