I am captivated by a recent chart from Bloomberg that illustrates the anticipated movements in interest rates by central banks globally. What particularly catches my attention is Japan, represented in yellow on the far right of the chart.
Bloomberg’s economists, among others, posit that the Bank of Japan, known for its steadfast reluctance to significantly alter its ultra-loose monetary policy, including “yield curve control,” will stand alone in raising interest rates in 2024.
Such a move would be remarkably bold, especially as other central banks gear up for their initial rate cuts following the most substantial tightening cycle in recent decades. Indeed, Japan has marginally expanded the yield curve control policy range on occasions, but these have not constituted genuine tightening.
Should the Bank of Japan, occasionally known for its unexpected moves, indeed opt to increase interest rates while the global tightening momentum fades, betting on a strengthening yen seems almost inevitable. The Japanese yen is, after all, the prime reflector of the central bank’s divergent policy. It’s noteworthy that Japan’s Nikkei Index is currently at a 34-year high. Furthermore, an increase in Japanese interest rates might mean we won’t see such a move again for some time.
Reservations
However, I harbour reservations about whether the Bank of Japan will actually proceed with a rate hike. Japanese inflation is notably declining, currently at 2.5%, with Tokyo’s inflation, a precursor to the national figure, at 2.1%. This is significant for Japan, yet with central bank governors globally asserting the absence of structural 2% inflation, the leeway for tightening appears limited. Additionally, despite the drop in inflation, consumer spending in Japan has been negative in real terms for eight consecutive months. Moreover, Japan’s Manufacturing PMI is gradually deteriorating, now sitting well below 50.
The Bank of Japan may well consider its current stance as optimal. Why risk the turmoil of a soaring yen, potentially driving inflation down excessively? Moreover, the markets are well-acquainted with Japan’s extremely loose monetary policy, especially when considering factors like demographics and debt levels. Contrary to theoretical expectations that interest rates should rise in tandem with debt, practical evidence often shows the reverse. Debt sustainability is a covert objective for most central banks globally, with low interest rates frequently serving as the preferred instrument in this context. In any case, this wouldn’t be the first unexpected manoeuvre from the Bank of Japan.
Jeroen Blokland, the founder of True Insights, offers independent research to aid in constructing diversified multi-asset portfolios. Previously the head of multi-assets at Robeco, Blokland’s “Chart of the Week” is a regular feature every Monday on Investment Officer Luxembourg.