It's green on traders' screens on Friday across Asia, as investors breath a central-bank-inspired sigh of relief. Markets are up virtually across the board, with one or two minor exceptions.
Japan, Hong Kong, China, Singapore, South Korea, India and Australia are all higher. Taipei stocks opened higher, but ended narrowly down given a 0.3% fall in Taiwan Semiconductor Manufacturing Co. TW:2330 and (TSM) .
It's the 10th consecutive week of gains for the Japan market, the strongest run in a decade, since February 2013, when the Tokyo market was benefitting from optimism about "Abenomics" from then-newly elected prime minister Shinzo Abe.
Now, the rally is supported by the Bank of Japan's decision to stand pat on its super easy monetary policy, as the Japanese central bank ended its policy-board meeting today. That helped Japanese equities edge ahead to extend their heady 2023 rally, with the blue-chip Nikkei 225 now up 31.1% this year, and the broad-market Topix up 23.1%.
Are central banks sexy?! Few investors will have pinups of Fed chiefs Jay Powell, Janet Yellen or Ben Bernanke on their walls. Fewer yet would be able to pick Bank of Japan Governor Kazuo Ueda out of a lineup of random people. Yet central-bank decisions are dominating the conversation on Wall Street.
They are driving the markets in Asia less frequently, but dictating the broader trends around the timing of rate decisions.
Japan's monetary policy was crafted in the Abe era, and remains the same. Today's decision did send the yen south, to ¥141 to the U.S. dollar, a level last seen in November. Since mid-January, when it broke below ¥128, the yen has lost 10.4%.
The watchword of the BOJ decision is "moderately." Corporate profits are generally high, so capex has increased "moderately." Employment and wages are decent, so income has improved "moderately." Despite inflation, private consumption has increased "moderately." Public spending is up "moderately." Financial conditions... well, they're "accommodative on the whole." Japan's economy is likely to "recovery moderately" around the middle of this fiscal year, which runs through March 2024.
The BOJ said today that it will sustain short-term interest rates that are marginally in negative territory, at -0.1%, and mid-term rates of around 0.0%. The BOJ will also maintain its trading band for the mid-term 10-year Japanese government bond, allowing it to fluctuate ±0.5 percentage points above or below the 0.0% target.
As the U.S. Federal Reserve went on its rate-hike sequence, the process put intense pressure on Japan's central bank, which saw its currency suffer drastically while it failed to match the higher interest rates elsewhere in the world.
Those pressures have waned, although the Japanese currency has been sliding since a very short-lived rally at the start of last month. It's actually faring comparatively worse against the euro than the dollar, slipping to a 15-year low today of ¥154. That's of course driven by the interest-rate differential after the European Central Bank raised rates to a 22-year high on Thursday. Today was the opportunity for Asia-based traders to respond.
Inflation in Japan is running around 3.5% as higher energy and raw-material costs get passed on down the line toward consumers. But the Japanese central bank believes a virtuous cycle will proceed to develop as higher incomes offset higher prices, then translate into higher spending.
Ueda and his policy team warn that there are "extremely high uncertainties" for the Japanese economy. Overseas activity is a concern as are commodity prices and geopolitical issues such as the war in Ukraine. "With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions," Ueda and his team state.
The Japanese central bank and government have agreed to target 2% inflation. They're getting more than they bargained for at the moment, but inflation pressures are likely to ease in a country that imports all its oil, given that the elevated commodity prices and high costs for transportation that were originally underpinning the price gains have now waned.
Where did this idealized idea of inflation running around 2% come from? New Zealand, apparently, where the central bank sets rates for 5 million people and 25 million sheep, as outlined in an entertaining column in The New York Times by the Nobel-winning economist Paul Krugman, "Wonking Out: How Low Must Inflation Go?"
Krugman explains that that there's no real reason 2% is the gold standard for inflation. It could as easily be 3%. Or 1%. He at one point argued that 4% would be about right, although he now thinks that might be a bit high. In any case, it's all a bit arbitrary.
Of more pertinence to our current situation, there is certainly not a strong case that a central bank should penalize an economy and cost people jobs in order to pressure inflation down from 3% to 2%, Krugman concludes.
So the BOJ has probably got it about right. The Japanese economy is heading in the right direction. Growth is solid, and wages are going up. Things look good, as always with the proviso that there are plenty of uncertainties - and whenever are there not plenty of uncertainties?
One thing's for certain. Japan would rather face a little bit of inflation than contend with the deflation that plagued the economy for three "lost decades." It's a victory that prices are advancing at all.
The government is taking the first step that it typically takes when the yen starts to weaken: talk the market up a little. Finance Minister Shunichi Suzuki said today that "excessive volatility" in the yen is "undesirable," though it doesn't look like, as yet, he's going to do anything about it.
"Currency levels should be set by markets, reflecting fundamentals," Suzuki told reporters. The yen should "move stably. We will continue to watch closely from now on as well."
There's always the chance that Japan will intervene in currency markets. For now, Suzuki says the government is happy to work with the BOJ to achieve that 2% inflation target.
Those external uncertainties will always be a concern. For now, Japan appears to have exited Covid-19 without an enormous price spike or asset bubble, and looks set to enjoy steady growth. Stocks may pause if the inflows from international investors trail off, with Asia-focused capital currently recycling from China into Japan.
