Ahead of the Bank of Japan (BoJ) monetary policy meeting on 26-27 April, Katsunori Kitakura, lead strategist at SuMi TRUST, comments that until productivity rises and the dollar strengthens, the BoJ will hold its policy stance
“Market watchers looking for signs the BoJ will begin following in the footsteps of the Federal Reserve and ECB are likely to be disappointed. With inflation far below the BoJ’s current 2% target, the BoJ will not start a move towards normalising policy.
“It is difficult to see normalisation during 2018; we predict any normalisation to take place in 2019. Although the labour shortage has raised wages, productivity remains flat and this is one reason why wages have not risen faster. Until wages begin to increase in tandem with productivity, we will not get the desired inflation the BoJ hopes for, pushing back when normalisation will take place. There is also the fear that normalisation might bring with it a stronger yen.
“This is the first meeting of Governor Kuroda’s second term, and the debut meeting for Deputy Governors Amamiya and Wakatabe. Amamiya has supported Kuroda within the BoJ, and Wakatabe is an advocate of reflation. There is no strong opposition to Governor Kuroda’s current policy of maintaining easy money until the 2% inflation target is attained.
“The foreign exchange rate, politics and trade friction are the main risks to the Japanese economy. Exporters remain profitable and production has been rising at the current rate of JPY 105 to the US dollar. However, should the yen climb to JPY 100 (or higher) we could see lower share prices, a deterioration in business confidence, and an adverse impact on employment and capital expenditure.
“Regarding political developments, Prime Minister Abe’s approval ratings have fallen sharply of late. However, even in the event Abe resigns or loses in the September LDP presidential election, the LDP will continue to reign, and the BoJ will continue to work closely with the government. There is a strong possibility that yield curve control will continue, and any spike in market volatility will be short lived.
“On a global level, should the confrontation surrounding US-China trade friction escalate, trade volumes would decline, impacting shipping and other industries. Encouragingly the recent Abe-Trump meeting showed no signs of confrontation as some had feared, although there is still a gap between the two nations as Japan seeks the US return to TPP, and the US seeks bilateral talks. This will be far more important to Japan than Sino-US trade frictions.”