Tuesday’s decision to double the trading band of the 10-year Japanese government bond was another master class in timing — and with just two monetary-policy meetings left before his term expires in April — possibly his last. While a move like this was widely expected at some stage, the BOJ governor had been so vociferous in his denials for months now, all 47 economists surveyed by Bloomberg expected nothing today — not even the kind of tweak we got. With traders in Japan and overseas either off for the holidays or winding down for the year, a sleepy, sunny December Tuesday was the perfect backdrop for one last rug-pull.
And what a surprise this was. Adjustments to yield-curve control in July 2018 and March 2021 were preceded by media reports on upcoming changes, including a full-sail leak last year of how much the 10-year JGB trading band would be widened. This time, there was nothing — not even a hint that some change was coming; instead, we got what increasingly looks like a head-fake on next year’s policy review.
There’s one key question dividing the market now: Is this a last hurrah for Kuroda, or the first step in a tightening policy that will be continued under his successor, who may very well have been in the room with him today?
Speaking to reporters after the decision, Kuroda was at pains to note that this wasn’t an effective rate hike. “This isn’t the first step towards an exit,” he said, stressing over and over again that today’s move was a technical one to smooth the yield curve and not intended to signal a more hawkish turn. “Reviewing yield-curve control or the quantitative and qualitative easing program is unthinkable for the foreseeable future.”
Nonetheless, it will be tempting to come to the conclusion that the BOJ is the final chapter in a monetary-policy year for the history books. According to this argument, the most aggressive tightening in decades by central banks proved irresistible, even to perennial holdout Japan. It’s not entirely without merit: Even the relatively modest price gains in Japan compared to the US and Europe are a shock for people more accustomed to warding off deflation.
But the perspective also has some significant caveats. Kuroda has made policy somewhat less loose, but it’s a long way from tight. The era of easy money continues: The benchmark rate is still negative, and the BOJ still says it’s prepared to ease further if necessary. Moreover, Kuroda’s decision comes late in the game. The BOJ may have moved a bit toward the other major economies, but they are getting ready to edge toward his position; the rate cycle around the world is close to peaking and borrowing costs may well retreat in 2023.
While Federal Reserve Chair Jerome Powell is adamant the US central bank has more work to do, the really heavy lifting is behind it. The Fed is reducing the magnitude of its hikes and likely only has a few to come. Rates may well be cut by next December, according to some economists. When the Bank of England lifted its rate last week, officials said inflation might have peaked and two policymakers thought they had already done enough. Early mover South Korea has probably overdone it and may be forced into big rate reductions. If Kuroda is coming to a rate-hike party, not only has he missed the DJ, but he forgot to bring a bottle for the hosts.
But this likely explains Kuroda’s timing. A tweak to the trading band has been on the cards for some time — this is, after all, the third such change, which would have come regardless of the pressure on the yen. Kuroda was at pains to dismiss the suggestion that this is a move toward the exit — hence making it now rather than in April, when it might have been more widely interpreted as the BOJ joining in on the tightening . Indeed, he said, today’s changes would only make yield-curve control even more effective and sustainable. He stuck by his view that inflation in Japan will pass — in effect, admitting defeat in his goal to create stable inflation.
When Kuroda and his successor look around the world, they aren’t likely to be amused by what they see. The advent of a global recession next year, if we aren’t in one now, will restrain any meaningfully hawkish tendencies. Kuroda’s predecessors lifted off from near zero in 2000 and 2006, only to retreat in the world downdrafts that followed. The bank will be wary of a repeat performance.
One fundamental fact remains against the normalization argument: Japan’s inflation is largely imported, not demand-driven, and would be little affected by the type of rate tools the BOJ has at its disposal. Furthermore, with the spring shunto wage negotiations just around the corner, the idea that the central bank wants to crack down on rising prices right before they feed back into paypackets is tough to swallow.
The talks, almost everyone agrees, won’t be enough by themselves to create demand-pull inflation in Japan, which the country wants even as other nations try to dampen it. But they nonetheless will put a significant marker down and encourage more government action — even as some retailers, such as furniture giant Nitori Holdings Co., are already talking about the opportunity to cut prices next year if the strong yen trend becomes established.
After today, that trend looks more likely to continue. And with the yen weak but not too weak, inflation positive but not too entrenched, wages on an uptrend — and markets once again stunned — Kuroda might yet be able to have the last laugh.
More From Bloomberg Opinion:
• Kuroda Can’t Get to Yes. Should He Try?: Moss & Reidy
• What’s the Point of Hiking When Recession Looms?: Gearoid Reidy
• Japan’s FX Intervention Underlines Kuroda Isolation: Daniel Moss
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.
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