Japan – New Era, Same Problems
It is all too easy to be totally transfixed by Brexit. However, in terms of the wider world other defining changes are taking place, culturally and economically.
One cultural example is the generational and symbolic transfer of power underway following the abdication of Japan’s current Emperor Akihito, in favour of his son, Crown Prince Naruhito. The crown prince is taking over as emperor at an important time for Japan and its future economic prospects.
The rise of a new emperor is so important it is marked by an unprecedented ten-day holiday, termed the “golden week”. This golden week happens each year, but is usually marked by a collection of 4 national holidays taking place within 7 days.
During golden week stock markets will close but travel, spending and general levels of happiness, engendered by the holiday mood, are likely to improve. In anticipation of this the stock market picked up slightly ahead of the holiday closure.
Of course, these are short term factors. Meanwhile the economy is struggling with a rapidly ageing population. The clearest manifestation of this unhelpful demographic trend is the country’s stubbornly low inflation rate. According to most recent figures, inflation is just 0.5% and a whisker away from deflation; something the authorities are keen to avoid.
To focus attention on this matter, the BoJ has set a target inflation rate of 2%, believing it is necessary for prices to rise to stimulate more spending and less saving. If inflation is too high it causes uncertainty for investors, but too low, as in Japan’s case, it disincentivises consumption of goods and services. The lack of inflation also impacts economic growth in a negative way.
In the chart below, we can see the difficulty facing the BoJ. It has only hit its target in 13 of the last 101 months and the last time it succeeded was way back in 2014.
Japanese Inflation Rate vs Target Rate
Source: Bloomberg, April 2019
Most commentators reckon that Japan’s governing masters have been late, and slow, to combat stagnating prices. However, for the past six years they have been pursuing monetary stimulus with gusto; having conducted one of the largest government bond buyback schemes, roughly $715 billion a year.
Despite the BoJ’s recent best efforts, and Shinzo Abe’s three arrows policy, which embraces fiscal stimulus and structural reform alongside monetary easing, inflation is drifting further from its target. The BoJ is now unwilling to add further monetary stimulus, but recently stated that interest rate rises will be on hold for an ‘extended period’ to Spring 2020. They are hoping greater clarity and detail around interest rate levels will stimulate higher spending activity.
In conclusion, economists are hopeful that a new emperor will give Japan’s economy a much-needed short term boost and that, longer term, the move to keep interest rates steady and low will sustain growth and push up prices. Fingers crossed.