Recently, there was the BOJ Monetary Policy

Recently, there was the BOJ Monetary Policy Meeting. As expected, the benchmark interest rate was left unchanged at -0.1% and the YCC and other qualitative easing programs were also maintained. What was more important than this was the stance of Bank of Japan Governor Ueda, who stealthily showed at the press conference. Just as the market expected that a shift to austerity would be inevitable, Ueda did not deny it. Then, the possible impact on the market would be strong when a shift to austerity occurs. Japan’s quantitative easing (of course, it has been strengthened significantly in Abenomics) since the financial crisis, and the YCC since 16 years later, have become routine. Changing that would have been very burdensome.

The answer is to tighten, but slow down in order to cushion the impact of the market. So when asked if we’re going to make policy adjustments in March, I’m going to report the data, but I think we’ll see more data in April. Yes, we have to slow it down a little bit. We’ve indicated that even if we do shift to austerity, the journey to real austerity, including the actual additional interest rate hikes, is going to be quite slow. And I told you that the ongoing stock purchase program is still going to be effective. It should be possible around the middle of March to see what kind of wage increase Japan has seen since the beginning of the spring… I think the expectations for the Bank of Japan to shift its monetary policy around this point will be very strong. And the Bank of Japan will be thinking about how to press these strong expectations while feeling “warmed.”

What’s more noticeable is that the Bank of Japan raised its growth forecast for FY24 from what it expected at the end of last year, and lowered its consumer price index forecast. If growth is slightly stronger and prices are slightly more stable… Isn’t this a beautiful scenario? In this context, we can see the reason why the Japanese financial market has been so hot lately. There’s a lot of talk about it. It’s because the Japanese authorities made the policy nice. It’s because the Japanese economy is getting better… It’s because the real economy is getting better… It’s because the money in China is going to Japan. And so on. It’s undeniable that these things have a significant impact. But I’m going to take a long view.

Why was the Japanese financial market sluggish? The Japanese stock market, for example, has yet to recapture its peak in 1989. Why was Japan sluggish for more than 30 years? The bubble burst was the largest. But the more accurate reason is that the deflation caused by the bubble burst … and the chronicity of that deflation … has probably been the biggest sticking point. In the face of chronic deflation, people don’t spend. And if consumption disappears, companies will invest less, and employment will contract … and consumption will be even worse. And the decline in asset prices will also strengthen this slowdown in consumption.

Consumption contraction due to deflation… long-term stagnation… This might have been a typical explanation for the sluggishness of the Japanese financial market. But recently, inflation, not deflation, is happening in Japan. People are trying to reduce consumption in a deflationary situation where prices are falling. On the other hand, when prices are going up, they’re going to have to increase consumption. They’re going to have to buy in advance before prices go up. So is inflation good in Japan? It’s good to get out of deflation. But if inflation is too strong, it’s going to be a problem again. The Bank of Japan is also considering adjusting the YCC to control excessive inflation and lifting negative interest rates. Fortunately, inflation is being slightly lowered. The Bank of Japan’s forecast the previous day showed confidence that it could push it back below 2.5%.

At this level of inflation, it’s likely that Japanese wages will go up after the spring tussle. Just rising prices could lead to another kind of contraction in consumption, but as wages go up, why don’t those wage increases drive inflation? Oh, mistake. Why don’t those wage increases drive milder inflation? Let’s change the question to … Is it a weakening picture of the deflationary evil that’s been gripping the Japanese economy for the past 30 years? And the shadow of deflation that has suppressed Japan is now hanging over China, not Japan. On the other side of China, which is raising fears of deflation caused by slowing growth, Japan is now trying to get out of that deflation. I think the recent trend is that there’s a certain level that has led to that difference in performance.

So, is the only thing that’s left for the Japanese market now? Well, with inflation raging from deflation to inflation, inflation overshooting can be a problem, while keeping this in a nice way… controlling what’s too strong without killing the bud of inflation… You have to play a nice game. This is not going to be easy. Long-lasting deflation, long-running good-bye, long-running good-bye to monetary easing, long-running good-bye… whether it’s nice or not. That tipping point will be apparent in the second and third quarters of this year. It’s going to be a critical time to get out of the lost 30 years. I’m going to cut down on today’s essay. Thank you.