More on Japan and the BOJ

This is really an update to the post below but I think that it deserves attention above the fold as it were. Over at Bonobo Land Edward also offers his views on the coming interest rate decision at BOJ this week. Edward does not believe a raise would be prudent in Japan and I have to side with him on this but this of course leaves the actual decision which is a much closer race this time around due to the much allured '4th quarter tailwind'. Moreover, Edward also points to a piece by David Pilling in the FT which gives a very well argued and readable account of recent monetary policy history in Japan. Pilling's pieces tentatively suggests that the BOJ acutally might choose to raise rates here at this juncture. But as Edward also quotes Pilling, this is really a question of a tremendous dillemma facing the BOJ ...

“They are in a dilemma. Either way they will be criticised,” says Mr Murashima. “If they don’t raise rates while maintaining their central scenario on the economy and prices, people will say they have abandoned their forward-looking framework. But if they raise rates and core inflation turns negative, politicians will criticise them for making a policy mistake.”

On one side of the debate, many academic economists argue that it is ludicrous even to consider raising rates now. Stripped of energy costs – the normal practice in other advanced economies – Japanese prices are still falling. Few textbooks, to put it mildly, advocate tightening at such a juncture.

Furthermore, sceptics say, the BoJ’s central scenario on which it bases monetary policy is patently failing to come to fruition. The bank has said it expects profits gradually to feed through to wages and consumption, exerting upward pressure on prices. But wages have barely budged, as companies have held tenaciously on to their earnings. Although consumption grew strongly in the fourth quarter, as revealed in the GDP numbers, that merely cancelled out an equally sharp drop in the previous three months.


In the past few weeks, Tokyo has come under pressure from European – though not US – officials over the weak yen which, in trade-weighted terms, is at 20-year lows. Some European finance ministers have linked the issue to Japanese interest rates being 5 percentage points below those in the US and the UK. As well as making Japan’s exports “unfairly” competitive, the criticism goes, the wide differential has fuelled the so-called carry trade, encouraging people to convert cheap yen into higher-yielding foreign assets.

So, this is definitely not an easy decision but on in terms of trade offs I would argue a hold but as Pilling also so eloquently shows the history and internal as well as external pressures are clouding the skies over what actually seems to be a straight forward decision based on economic fundamentals.

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