Uncertainties Prevent Japan From Hiking Rates, Say Wealth Managers

Amanda Cheesley Deputy Editor 26 September 2023


Investment managers discuss the Bank of Japan’s latest monetary policy decision and its impact.

The decision on Friday to stay on hold reflects what the Bank of Japan characterised as extremely high uncertainties surrounding Japan’s outlook for economic activity and prices. It comes as no surprise according to wealth managers.

“The Bank of Japan kept its policy settings unchanged. No surprises there. The interest on excess reserves stays at -0.1 per cent. The yield curve control range on 10-year Japanese government bonds remains at -0.50 per cent to +0.50 per cent, with greater flexibility up to a 1 per cent limit – to preclude disorderly moves in government bond yields,” Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, said in a note.

The uncertainties stem from weakening demand in key global economies, elevated commodity prices and uncertainties regarding domestic firms’ price and wage-setting behaviour, she said on Friday.

Chief global strategist John Vail at Nikko Asset Management also believes that the bank’s decision presents no surprises from his end. “Clearly some hawkish market participants were disappointed, as the yen weakened a bit," Vail said. Governor Ueda will add context to the “extremely uncertain” situation, as they cited, and his comments should not be misinterpreted or exaggerated by market participants, he added.

After a succession of rate hikes in countries around the world to curb inflation, attention moved to Japan late last week to see what it would do. 

BNY's Mitra detected a slightly more constructive view on their longer-term view on inflation. In its policy statement, the broader expectation was for above potential output to be maintained despite the risks, and for output gaps to narrow. These, they said, would be accompanied over a longer-horizon by changes in factors such as firms wage- and price-setting behaviour. 

“That said, there is a whiff of stagflation underway,” Mitra said. “The August consumer price index released on Friday showed inflation running slightly ahead of expectations. But the September purchasing managers' index eased more notably, led by a slump in manufacturing,” she continued.

Amidst all this, the yen has remained under pressure, she said. It is the worst performing G10 currency, with a near 12 per cent fall against the dollar in the year-to-date. This is boosting corporate profits, especially of offshore earnings. But, despite rising nominal wages, it is also keeping real inflation-adjusted wages in the red, she said.

Outsized yen weakening has prompted jawboning by finance ministry officials and fuelled talk about additional foreign exchange intervention. Moreover, the Bank of Japan governor also recently chimed in with hints about a shift in policy settings.

Looking ahead, adjustments to the Bank of Japan broad members' median expectations for activity and prices at the October meeting will bear watching. But ultimately, outsized yen weakness may tip the balance in favour of quicker, though, modest, policy adjustments to end negative interest rates, especially as US rates have hardened more than expected and the differential with Japanese rates has risen.

From a timing standpoint, Mitra believes that the main challenge for the BOJ will be to strike a balance between a damagingly pre-emptive tightening while at the same time avoiding an exchange rate pass-through (from outsized yen weakness) to inflation which would generate a cost-of-living shock.

Vail believes that the Bank of Japan, like nearly all OECD central banks, seems to be in a “wait and see” mode with a mild hawkish bias. “The global situation is quite unique and prone to sudden shocks, so predicting the future is very difficult and requires being nimble, as they also cited,” he said.

Despite this, many investment managers have touted Japan as an attractive place to invest in in 2023, with the country being at a key point driven by corporate reform and expectations of the new Bank of Japan Governor Kazuo Ueda’s approach to monetary policy. Andy McCagg, senior client portfolio manager for Japanese equities at Tokyo-based Nomura Asset Management, believes that there are a lot of investment opportunities out there. See more here and here. 

In contrast, Sonal Desai, chief investment officer for US-based investment manager Franklin Templeton Fixed Income, recently downgraded their outlook for Japanese government debt as she sees that the market is in an unstable equilibrium. The Bank of Japan has yet to make substantial moves to address increasing inflation, she said in a statement. Yields are most likely to move higher over the medium term, making JGBs unattractive, in her view. See more here.

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