Analysis |  The markets' magical thinking about China has extended to the BOJ

Analysis | The markets’ magical thinking about China has extended to the BOJ


When it comes to the future development of Asia’s largest economies, the market can’t help but expect disappointment.

For months now, traders have bonded over when China might emerge from Covid Zero. They expected the country to relax first after the Winter Olympics, then after the National Congress in October and the coronation of Xi Jinping’s third term. Now, some are seeing this happening possibly in the spring of next year, if you believe the screenshots shared online. Throughout, the message from policy makers has been unequivocal: no change is coming.

A similar expectation has crept into the thinking around the Bank of Japan. An exit from negative rates and/or yield curve control was inevitable (many said so) earlier this year as the yen weakened. When that failed, surely when the currency fell to 150 against the dollar. Well, if not, certainly when Governor Haruhiko Kuroda’s replacement arrives next April.

Throughout, the message from policy makers has been unequivocal: no change is coming.

With Kuroda having convinced the markets that he will not deviate from his trajectory, expectations have grown that change will occur under his successor. Media attention in the coming months will shift to who is likely to win the five-year term. Current deputy governor and architect of yield curve control Masayoshi Amamiya is seen as the frontrunner, and former deputy Hiroshi Nakaso is also a top contender.

But if there is to be “Amamiyanomics” or “Nakasonomics”, they probably won’t be revealed in a hurry. Consider the economic situation in April when the new governor takes office: recessions are widely anticipated in the United States and Europe. The Federal Reserve should be past its tightening phase. And China’s poor performance will be particularly painful.

In recent decades, the world could generally rely on Chinese growth to prevent global slowdowns from becoming calamities. The Covid 2020 crisis was an exception, although China experienced a powerful rebound. That has since faded, and the country’s expansion this year will not come close to the official projection of around 5.5%. Few economists see China making great strides next year if Covid Zero remains. But to the extent that it will reduce growth at home and beyond, it would certainly justify Kuroda’s insistence on staying the course. More than that, it could tie the hands of his successor until the end of their term.

What if Covid Zero disappears and Chinese growth picks up, boosting the global economy – would that pave the way for change in Japan? It is a mistake to assume that new central bankers bring with them a reform agenda from day one. When Ben Bernanke became Fed Chairman in 2006, the feeling was that his priority would be to formalize an inflation target. He did – but not for six years and along the way he had to fight a global crisis. Incumbent Jerome Powell was considered a dot-plot skeptic, but found practical uses for interest rate projections. Mario Draghi had been president of the European Central Bank for nearly a year before pledging to do “whatever it takes” to resolve a debt crisis.

Also, by the time Kuroda’s successor is in place, domestic events will be front and center, with the results of the spring shunto wage negotiations just beginning to trickle down to the economy. Any new governor is unlikely to risk what could ultimately be a break from the deflationary mindset, and hope that wage negotiations will lead to the long-awaited virtuous circle of wage and price increases. Amamiya signaled this in a July speech, emphasizing the need for wages to rise faster than inflation, but noting his concern that it might not happen this year.

The last thing a central banker wants to do if they are unconvinced of inflation persistence is to tighten towards a sharp slowdown – especially if wage growth is a long time coming. “The risk is that the global growth environment will deteriorate before a change in the BOJ-hoped inflation momentum takes hold,” BofA Securities economists Izumi Devalier and Takayasu Kudo wrote in a recent note. .

All of this explains why most economists consider change unlikely, with more than two-thirds expecting an adjustment to the 10-year JGB yield target, currently around 0%, either after 2023 or not at all. everything. The whole half says the same about even an adjustment in the language of the tightening orientation. And fundamentally, inflation in Japan, much lower than in other countries, makes the case for action much more difficult, regardless of where the yen is heading next April.

“People say the BOJ is an outlier, but the BOJ’s monetary policy judgment is not an outlier,” former board member Sayuri Shirai told us last week. She pointed to the low rate of underlying inflation, as well as the expectations of businesses and households that its pace will decline, as reasons why the BOJ is right to stay the course. “If other central banks were like Japan, they wouldn’t be raising interest rates,” she said.

Circumstances tend to guide office actions rather than ready-made solutions. And if it’s not enough to listen to the people likely to make the decisions, there is room for a thorough review in Beijing. China may well be looking for an exit ramp from the more draconian aspects of its anti-Covid policy. But if the substance of the approach persists into next year, as opposed to a few pinches and pullbacks, the odds of a change at the BOJ also look close to zero.

More from Bloomberg Opinion:

• Kuroda cannot access Yes. Should he try? : Moss & Reidy

• Is the reopening of greater China Covid a myth or an obligation? : Shuli Ren

• Believe that Japan accepts a weak yen: Moss and Reidy

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

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 deputy chief of the Tokyo bureau.

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