Japan's influential central bank chief, Haruhiko Kuroda, chaired his final interest rate meeting here on Friday, opting to maintain the super-easy monetary policy that has been a feature of the world's third-largest economy during his decade-long tenure.
The Japanese yen weakened although by a modest 0.6%, approaching ¥137 to the U.S. dollar. Japanese stocks moved sharply lower, with the broad-market Topix ending down 1.9% and the Dow-like Nikkei 225 off 1.7%, but they moved in tandem with other Asian markets after hefty selling on Wall Street the day before.
Chinese shares finished down 1.3% in the form of the mainland's CSI 300 index as President Xi Jinping was elected to a third five-year term as president. The precedent-busting tenure follows his election as general secretary of the Chinese Communist Party and head of the armed forces for third terms in October. Hong Kong's free-and-open market sold off 3.0% in the form of the Hang Seng.
While Bank of Japan Governor Kuroda is due to step down on April 8 after two five-year terms, the effects of his policies will continue to be felt for years to come. He was a pioneer in taking interest rates into negative territory, a controversial tactic when he first deployed it in 2016, but a move that many central banks copied in response to the pandemic.
He deserves credit for pulling Japan's economy out of three "lost decades," the period after Japan's 1980s asset bubble, a time of deflation during which Japan constantly was dipping in and out of recession. From 1992 through 2013, inflation hardly ever crossed above 1% and prices declined in 11 of those years.
While central bankers around the world are now contending with outsize inflation, a deflationary economy is devastating. Companies hold off on expansion and capital expenditures and consumers defer big-ticket purchases as long as possible because the cost of construction or an apartment or car likely will be cheaper in the future. The Japanese economy went nowhere as a result and saw China's GDP surpass it.
Kuroda helped break the deflationary cycle as he and late Prime Minister Shinzo Abe breathed economic optimism back into the Japanese psyche. It hasn't been perfect, but Kuroda has encouraged companies to embark on bigger investment plans, prices finally are starting to move higher and we await signs of persistent wage growth to complete what would become a virtuous cycle.
The first policy board meeting under the man nominated as Kuroda's replacement, the academic and economist Kazuo Ueda, is scheduled for April 27-28. The central bank is also due to release its forecasts for growth and inflation through 2025 at that time.
The Upper House of Japan's parliament approved Ueda's appointment on Friday, one day after the Lower House did the same. Both houses of the Diet also approved his two deputies, career central banker Shinichi Uchida and former Financial Services Agency commissioner Ryozo Himino. The deputies assume their posts on March 20.
Kuroda, a former president of the Asian Development Bank, took the reins in March 2013 under Abe, who caused a rally in Japanese assets upon his election in December 2012. Kuroda-san became a key ally in unleashing "Abenomics" in a bid to revitalize Japan. He unleashed the first arrow of the plan, super-easy monetary policy. Abe launched the second, fiscal stimulus through increased government spending, but was less successful in putting in place the third, structural reform.
The look-ahead coming out of the next meeting should give us a better idea of how the three new appointees intend to steer the BOJ. However, the ruling-party bloc controlled by the Abe faction still holds great influence within the party of Prime Minister Fumio Kishida, so there are powerful vested interests who would like to see the era of easy money continue.
Today's monetary policy board meeting leaves short-term interest rates in negative territory, at -0.1%, with the Bank of Japan committing to keep long-term rates at or around 0.0% by buying Japanese government bonds (JGBs).
Banks have been clamoring for the central bank to abandon its yield curve control, which hurts their profitability. Traders also have been attempting to front-run the central bank in abandoning yield curve control, or YCC, sometimes getting it badly wrong, as I explained in mid-January after the BOJ surprisingly expanded the trading band it allows on JGB yields. But at least today, the BOJ says it will continue to allow the yield on the 10-year JGB to fluctuate up or down 0.5% from its target level.
Ueda ultimately may move away from that policy, but it's clear he won't be in a hurry. We can expect a review of the central bank's course when he takes charge. However, Ueda has already said he believes Kuroda's approach was "unavoidable."
The Japanese government and the central bank agreed as far back as 2013 to try to sustain inflation at a rate of 2%. They hit that target the year after Kuroda's appointment, when an increase in Japan's sales tax took effect. But the 2.8% inflation rate in 2014 was transitory and prices soon shifted into reverse again, a cycle only broken by recent increases in energy prices. At the January rate of 4.2%, the latest available figure, inflation is running at its highest level since 1981, when the revolution in Iran caused lower crude production and an oil crisis.
Data released on Tuesday show real wages in Japan are declining at an equal pace. The 4.1% drop in inflation-adjusted wages for January is the worst decrease in take-home pay since that last inflation spike in 2014. Economists believe energy costs have now peaked, while the government has introduced electricity and gas subsidies. It's likely this is also the nadir for wages.
That wages they are still declining will help dictate the thinking of Ueda, who would value getting a little more money into the pockets of wage earners above benefitting banks and bond traders. We can expect sustained noise about extreme pressure on the central bank voiced by those with a financial incentive in seeing the yield curve control end. And we can expect Ueda to resist those calls until he is sure wages are consistently moving higher.
In today's minutes, the central bank also rephrased wording from January, which back then said exports and output were trending higher. Today's assessment is less optimistic and says they are "more or less flat" thanks to sluggish international demand. It also says there are "extremely high uncertainties" for Japan's economy, driven by the war in Ukraine, commodity prices, overseas economic activity and the lingering effects of Covid-19.
Kuroda may be departing, but his policies will remain in place for some time. It may be until the end of the year before we see any significant changes from Ueda and the new team in charge.
