Correcting to the Fundamentals in Japan?
Regular readers of Alpha.Sources should be well up to date with the recent flurry on the BOJ decision to hold rates last Thursday contrary to general market expectations. For the big picture you could also read my note over at GEM on Japan's economy in general. Meanwhile over at Morgan Stanley's GEF there has also been much discussion amongst the commentators where for example Takehiro Sato was quickly out to explain and apologize last Thursday that MS had been calling the rate hike that never happened. Also the chief economist Stephen Roach chimed in and voiced his general concern that the 'old guard' in Japan might be close to clawing back the authority on monetary policy on the back of a BOJ which is unable to communicate and build fait with the markets. Moreover, and to be fair to Roach he also noted that perhaps in fact the Japanese economy just did not merit a raise this time around which then would mean double trouble for the BOJ since pressures to unwind carry trade is mounting. Now, Robert Alan Feldman which is also part of MS' Japan team bids in on the discussion as well and he does not agree with his boss.
In my view, however, the BoJ action has nothing to do at all with old guard dominance. Indeed, the people in the LDP who are most vocal against the BoJ are mostly Koizuimi supporters, like LDP Party Secretary Hidenao Nakagawa, METI Vice Minister Kozo Yamamoto, etc. If anything, this ‘new guard’ wants to see (a) rational economic decision making by a central bank, based on rules-based methods; and (b) a fiscal monetary mix that supports growth. Nakagawa himself cites the case of what Greenspan did under Clinton. That’s new guard. Moreover, one of the sharpest critics of BoJ rate hike talk has been former minister Takenaka, and he is about as new guard as you can get.
We should also note this where Feldman invokes what he coins as the deeper question concerning the BOJ's and Japan's economic situation.
The deeper question is the depth of the economic analysis and thought that underlies the BoJ decisions. Often overlooked is the crucial issue of fiscal-monetary coordination. Japan still has large fiscal deficits (although much smaller than a few years ago) and intergalactic government debt levels. It also faces an aging population and an intense need for capital accumulation. Interest rate levels must be set with these issues in mind. That is why the BoJ law set “healthy development of the national economy” as the BoJ’s goal.
I could not agree more and this is also why I fully endorse the last sentence in Feldman's piece about how investors should correct to the fundamentals rather than to the rhetorics.
As Steve said, the BoJ’s credibility as an institution has been damaged by this incident. But these wounds are self-inflicted. They can be healed if the BoJ returns to its own framework and acts accordingly. As the BoJ works toward this, the lesson for investors is clear: Look at the fundamentals, not at the rhetoric.