Today we look east to Nihon, or the land of the rising sun. It faces so many of our themes as for example the energy prices crisis affects it as a large energy importer and also poses a challenge to the fact that Japan has essentially been inflation free for some years now. Also as a country that imposes strict controls on interest-rates ( Yield Curve Control or YCC) how does it deal with a period of rising interest-rates and bond yields? Also there is the issue of wage growth where Japan has been a world leader but not in a good way as in real terms they peaked in 1997 and have never recovered. This is contrary to loads of media reports during the Abenomics period when wage growth was due every day, but it never happened.
Inflation
This is an awkward issue on several counts.
TOKYO, Feb 16 (Reuters) – Japan must respond to any damage inflicted on the economy by recent rising prices, Finance Minister Shunichi Suzuki said on Wednesday, a sign that the hit to households from the cost of living is emerging as a fresh headache for policymakers.
The first is that he has just criticised something that the Bank of Japan has been trying to achieve for years and indeed decades. It has a -0.1% official interest-rate and has bought hundreds of trillions of Japanese Government Bonds to this end. So it would come as quite a shock to it to note that this would cause damage.
Also if we look at the latest Bank of Japan Minutes from mid-December we might be wondering where this inflation is?
As for prices, members agreed that the year-on-year rate of change in the CPI had been at around 0 percent, mainly due to the rise in energy prices, despite being affected by
the reduction in mobile phone charges. A few members expressed the view that, when excluding temporary factors such as the effects of the reduction in mobile phone charges, the year-on-year rate of change in the CPI had been slightly positive, and that inflationary pressure had been observed.
Let us update things from the leading indicator for inflation across Japan.
The consumer price index for Ku-area of Tokyo in January 2022 (preliminary) was 100.3 (2020=100), up 0.5% over the year before seasonal adjustment, and up 0.3% from the previous month on a seasonally adjusted basis.
So we have a number less than a tenth of that reported in Europe, the US and UK. Japan’s resistance to inflation is really quite extraordinary. If we switch to the December numbers for the whole country we see in the detail that there have been energy price rises ( 11.2% annually) but they get offset elsewhere, mostly by the mobile phone price reductions. Actually that on its own is very Japanese as we in the UK face this.
MILLIONS of mobile phone customers face increases to their monthly bills of as much as 10% as the four network operators ramp up charges in the next few months. ( Evening Standard )
It is just so different to here as for example the furniture category has seen a fall over the past year. It may not be much ( 0.8%) but it is so different to the supply chain driven rises we have seen.
It is not that there is no pressure as producer prices are rising at an annual rate of 8.6% but as explained below it tends to get released.
firms’ price-setting behavior, which had been pointed out as persistently vigilant against a sales decline caused by price rises.
Interest-Rates
This is another story of Japan being well Japanese. The rest of the world has seen rises in longer-term interest-rates as bond yields have risen. Some countries have also seen official interest-rates rise. But the Bank of Japan is doing this.
The Bank will purchase a necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent.
It is determined to enforce it.
Bank of Japan Governor Haruhiko Kuroda says he will keep stimulus in place and conduct further unlimited bond purchases to keep bond yields within the central bank’s target range if necessary
Actually it showed its true love for JGBs on Monday as Valentines Day was the first of the new unlimited operations. Also you might think central banks would steer clear of use of the word unlimited after the Swiss National Bank debacle of a few tears ago. But the point is that Japan is resisting the trend and it has consequences. Firstly we face the possibility that the Bank of Japan will be the only buyer in the market. This is because of this explained by @MacroAlf
Japanese investors have very low and sticky domestic yields, hence they have learnt to look for opportunities abroad……..
Here is how a 10y Treasury bought by a Japanese investor hedging USD/JPY for 3 months looks like when compared with a 10y Japanese bond
The 3m FX-hedged UST yields almost 1% more
That’s a decent pick-up, and the BOJ capping JGB yields at 0.25% helps Japanese demand for USTs
So Mrs Watanabe will be looking abroad to get higher yields. So we have a curious situation where if this situation persists the Bank of Japan will own ever more of the Japanese bond market but the displaced Japanese investors will buy abroad. A sort of crowding out in its own bond market meaning we have a sort of implicit QE for the rest of the world.
Oh and regular readers will recall that the Bank of Japan stopped bond yields falling as well in the crisis. A curious move but if you control something that strictly you get unintended side effects. Anyway let me move on with the gentle enquiry as to what are the grounds on which the Bank of Japan believes it knows better than investors?
Real Wages
The Financial Times has today summed up one of the features of the Lost Decade quite well.
Companies in Japan have resisted raising prices by any means possible for the past three decades, helping to establish a mindset where inflationary expectations withered to nothing, and companies felt no shame in offering the nation’s workforce one of the lowest average wage increases in the OECD.
Putting it another way the real wages index was set at 100 back in 2015 and was 98.6 in 2021. This means the media are now giving us a rather different spin on the Abenomics era.
His predecessor Shinzo Abe gave his name to a clutch of economic reforms, Abenomics, which, among other unfulfilled ambitions, had hoped to secure a sustainable culture of wage rises without which it is difficult to boost consumption and grow the economy.
In a way it is amazing that there are not more wage rises when we note the state of play in the labour market.
Japan’s job market figures continue to reflect extraordinary tightness. There are 116 jobs available for every 100 applicants. CLSA’s analysis of the Bank of Japan’s quarterly surveys of business sentiment shows companies reporting labour shortages at levels equivalent to the years during the peak of the late 1980s bubble.
Comment
One way of looking at the Japanese situation is that they are in a state of denial about the economic situation. For example unless they can pull another rabbit out of the hat then inflation will look different in the spring.
But it has been held artificially low by massive price cuts that the government in effect forced on mobile phone companies to woo younger voters 12 months ago. From March, year-on-year comparisons in the CPI will have moved beyond that price-cut blip, producing a potentially eye-catching inflation figure that will feed into this year’s pay talks. ( FT)
Actually this year’s pay rises will have already been decided so it looks set for yet mre real wage falls. Then there is the issue of interest-rates and bond yields where we see another form of denial.
In some ways it all comes from this which is another trend heading our way.
The massive shrinkage in the working-age population, now declining at about 550,000 per year, is another factor. Pre-pandemic, those numbers were partially offset with large-scale immigration that amounted to roughly 200,000 new entrants every year.
Let me finish with a financial market curiosity. With the Ukraine issue you might think that safe haven Yen would be surging as it prices the possibility of Japan repatriating some of its foreign investments. Yet it has been stuck in a range of 115-116 versus the US Dollar.