What's the Point of Hiking When Recession Looms?

(Bloomberg Opinion) -- After months of pressure to join other central banks in tightening policy, the Bank of Japan finds itself right back where it’s been so often: expecting weaker growth, forecasting a temporary blip in inflation that ultimately will trail its target, and with a litany of uncertainties fogging up the horizon.  

While markets have been quick to blame central bankers for moving too slowly, Haruhiko Kuroda might just have outsmarted the lot. As the specter of a possible US recession looms and traders bet on Federal Reserve cuts next year, Japan could find itself ahead of the curve by having done nothing at all. 

Kuroda seems to have stared down those who expected him to blink. The pace of the yen’s slide has eased; election season is over, giving him some political breathing room; and consumer price data due Friday is still likely to show inflation just above 2% — high for Japan, but muted compared with other countries. 

That seems to bolster Kuroda’s case for keeping policy on hold, as he did again Thursday, even as others tighten, with the European Central Bank the latest set to join the rate-hike club. 

What would have been the point in tweaking policy anyway, Kuroda seemed to ask, positing that even raising rates would have had little impact on the yen. 

“It’s unthinkable that just a little rise in rates would put a halt to the weak yen,” Kuroda said. “If you really wanted to stop the weak yen through rates alone, you’d need a large rise in rates, which would really damage the economy.” He pointed to countries where central banks have been lifting rates, such as South Korea and the UK, which have also seen their currencies fall against the strong dollar. 

The BOJ spent a record $115 billion last month to defend yield-curve control, but zero so far this month. There’s been no take-up at any of its fixed-rate operations as pressure on rates has eased. Having so far survived the bets that it would abandon the policy, Kuroda can now look forward — if not to summer holidays, then at least a two-month respite with no monetary policy meetings due until late September.

Before that, though, Kuroda repeated for those in the back: Not only he is going to keep rates steady, he will also maintain the 0.25% band on the 10-year government bond. That comment, hardly unexpected, seemed to give the Japanese currency further room to slide toward the 140 yen to the dollar line that will again spark talk of intervention. 

Kuroda highlighted just how much uncertainty remains, from macro-level disruptions, such as Covid’s impact on supply chains and the war in Ukraine, to the challenge of designing policy in a country that long ago abandoned economic orthodoxy. 

Economics 101 teaches us that salaries should be pushed higher by rising prices. But because Japan is such a longstanding outlier, the textbooks go out the window. Thursday’s outlook highlighted that the bank isn’t sure if the current situation will lead to accelerated price hikes and higher inflation, or if entrenched expectations that wages won’t rise will become a self-fulfilling prophecy. 

That’s likely why Kuroda spoke at length, and in more definitive language than usual, about the need for wage hikes in order for inflation to be sustained — perhaps a nudge towards Prime Minister Fumio Kishida who, with Japan’s elections finally over, can now start to make serious policy. 

“Things in Japan are different” has often been an excuse for bad policy. But it’s hard to look beyond the impact of energy prices, rather than wages, on inflation. It’s also tough to argue that raising rates would impact what are largely imported price increases. That leaves the Bank of Japan the outlier. But, at least for the past three decades, ‘twas ever thus. More From Bloomberg Opinion:

• BOJ Seems to Be Reveling in Obstinate Isolation: Moss & Reidy
• Japan’s Lack of Inflation Tied to Loose Policy: Richard Cookson
• Now Even Central Bankers Are Blaming Themselves: Daniel Moss

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

Gearoid Reidy is a Bloomberg News senior editor covering Japan. He previously led the breaking news team in North Asia and was the Tokyo deputy bureau chief.

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