We can take the opportunity to wish the Emperor of Japan a happy birthday on our way to looking at the economic issues facing Japan. We can start with yesterday;s topic which has been the recent trend to higher bond yields and interest-rates which rather contrasts with this. From Bank of Japan Board Member Wakatabe on the second of this month.
Meanwhile, at the December 2022 MPM, the Bank modified its conduct of yield curve control in order to improve market functioning while maintaining accommodative financial conditions. The modification was done with the aim of enhancing the sustainability of monetary easing under yield curve control.
That is a really rather extraordinary way of presenting the fact that the Yield Curve Control policy was under so much pressure it essentially retreated from 0.25% for the ten-year to 0.5%. Indeed apparently it is really the same.
In sum, the Bank’s commitment to continuing with monetary easing has not changed at all.
Actually he was forced to admit a problem here.
the Bank has also increased its amount of Japanese government bond (JGB) purchases.
So the Bank of Japan continues to deserve the moniker of The Tokyo Whale. That is especially significant at the moment as we note that so many central banks are having to address the issue of losses on their QE bond purchases. The UK Treasury paid some £4.2 billion to the Bank of England in January and the US Federal Reserve is hoping that people will not spot that its “deferred assets” are really losses. The Bank of Japan has enormous holdings and unlike elsewhere if we bring things really up to date it is still buying.
The BOJ bought 300 billion yen ($2.2 billion) of Japanese government bonds with maturities of five to 10 years and 100 billion yen of bonds with maturities of 10 to 25 years.
“The emergency bond buying was a surprise as the latest attack on the BOJ’s policy is still at the beginning,” said Keisuke Tsuruta, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. ( Reuters)
Why? Well the pressure for higher bond yields is international as we looked at yesterday.
The yield on 10-year JGBs climbed to 0.505% on Wednesday, breaking through the central bank’s 0.5% cap and marking its highest level since Jan. 18. It last traded at 0.5%.
Foreign buyers can get far better yields elsewhere and even domestic investors ( Mrs Watanabe) will be noting this. For example there is a 2% per year “carry” in buying a ten-year German bond versus a Japanese one. Looked at this way The Tokyo Whale is looking rather beached as other buyers disappear. As of the 20th of this month it has some 584,352,000,104,000 Yen of them and rising. So as Colonel Abrams would sing.
Oh, oh I’m trapped
Like a fool I’m in a cage
I can’t get out
You see I’m trappedCan’t you see I’m so confused?
I can’t get out
So far the Bank of Japan has not raised its own costs as its official interest-rate has remained at -0.1% meaning it is now the sole place with negative interest-rates. The problem is that its potential liability keeps rising.
Japanese Yen
This has come under pressure again for the reasons explained above. The intervention of last year is still an overall success but at 135 Yen to the US Dollar it is less clear cut than when it went into the 127s. The Bank of Japan would not want to be intervening again as it would then have the economic equivalent of a war in two fronts with foreign exchange adding to the bond market.
Inflation
Japan has a different outlook on this as the Bank of Japan has wanted some for years if not decades. As Board Member Wakatabe pointed out.
In Japan, unlike in the United States and Europe, price changes for many items have been concentrated in a narrow range of around 0 percent for a long time.
The Lost Decade experience. But now the times they are a changing
The year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has accelerated gradually, reaching 4.0 percent for December 2022. This is the highest inflation rate in Japan in about four decades,
Wages
Staying with The Lost Decade experience we can switch to real wages which have been falling during it. Board Member Wakatabe is bullish.
Fifth, wages have risen. Base pay increases, which had not taken place in real terms for a prolonged period, have resumed since fiscal 2014, and nominal wages have increased, albeit moderately.
But the figures for real wages show a fall of 0.9% in 2022 which is a familiar experience for Japan. Putting it another way the real wages index which was at 101.2 in 2019 was 99.7. We advance on the spring Shunto wages round with the usual optimism in the financial media that so far has never met reality. This was reflected only yesterday by Reuters.
Toyota and the union federation representing 357,000 Toyota group workers said the base pay rise was the biggest in two decades, though they both declined to provide the percentage increase.
Ah so it is a secret! Honda was more revealing.
Within hours of Toyota’s announcement, rival Honda Motor Co Ltd (7267.T) said it had agreed to union demands for a 5% pay increase. The average monthly base salary rise of 12,500 yen ($92.70) at Honda is the biggest jump since at least 1990.
We previously looked at the rises at Uniqlo. But we have seen this before where rises are announced at major companies but they do not feed through into the wider working population.
Economic Outlook
Here we see a difference to the relative optimism with which 2023 has started elsewhere.
TOKYO, Feb 22 (Reuters) – Big manufacturers in Japan remained gloomy in February and the service-sector mood slid for a second straight month, a Reuters’ poll showed, a sign that the global slowdown is holding back the country’s recovery from COVID-induced economic doldrums.
That is not so different but this is.
The mood in the service sector slid for a second straight month to 17, down from a three-year high of +25 seen in December and underlining concerns about private consumption, which accounts for more than half the Japanese economy.
Maybe they got too optimistic in December but with lower energy prices and Japan being a large energy importer one might think it would especially welcome such news.
In some ways the final sentence of the Reuters piece summed up The Lost Decade experience.
Japan’s economy averted recession in the fourth quarter but rebounded much less than expected as business investment slumped.
Comment
There is a lot to consider so let me give you some nuance from Board Member Wakatabe.
Looking at the real GDP growth rate per capita, the rate was at 0.4 percent in the 2000s, whereas it recovered to 1.3 percent in the 2010s, almost equivalent to the average growth rate of the 1990s .
Although it is then followed by an example that echoes Mandy Rice-Davies.
I have always believed that the negative impact of a declining population on the economy tends to be overestimated in general discussion.
It also gets somewhat contradicted rather quickly.
Reflecting the declining and aging population, as well as the downtrend in working hours, Japan’s GDP growth rate is trending downward,
For newer readers it was struggling even pre pandemic. Also whilst output per person has risen real wages have not so whilst corporate Japan has profited workers have not.This means that weakness in domestic consumption ( another Lost Decade feature) continues.
Meanwhile The Tokyo Whale continues its feeding frenzy. At some point I expect it to end its negative interest-rate policy although it may not be at the March meeting.Under face culture that may be seen as an implied criticism of the departing Bank of Japan Governor Kuroda.