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There is a growing consensus that Japan has reached several inflection points: the critical 150-per-dollar level for the yen — its lowest in more than three decades — and 10-year Japanese government bonds (JGBs) trading above their 25 basis-point (bp) yield-curve control (YCC) cap, along with limited signs of a meaningful fall in global (ex-Japan) inflation anytime soon. The underlying message is that many overseas investors now view a Bank of Japan (BoJ) policy shift from its ultra-accommodative stance as inevitable in order to stem the yen’s slide, especially after the Ministry of Finance’s (MoF’s) yen-buying intervention failed (unsurprisingly) to provide more than a temporary respite from the currency’s persistent weakness.
|Japanese investors’ view*||Global investors’ view|
|US recession timing||2Q23, induced by Fed hiking into “restrictive” territory||Gradual slowdown skewed toward 4Q23, supported by tight labor market|
|US Fed’s terminal rate||4.75% – 5.00%||5.25% – 5.50%|
|$JPY||MoF defends 150 handle-line; $JPY falls back to 130 on BoJ policy tweak(s)||$JPY goes to 160 if terminal US rate >5% with JPY weakness “sticky” (structural)|
|Japan inflation||“One-off” inflationary pressures, contained at around 3% and peaking in 2Q23||Inflation likely to be problematic, following in the footsteps of US and Europe (where inflation was initially dismissed as “transitory”)|
|BoJ policy||Gradual, orderly fine-tuning of BoJ policy post Kuroda||10-yr YCC won’t last until April 2023 (when Kuroda’s term is up)|
Sources: Wellington Management, Bloomberg. *Based on a Bloomberg survey of Japanese economists and conversations with Wellington Management’s Japanese client base.
Notably, domestic Japanese investors seem to have some distinctly different opinions than their global investor counterparts, with the former mostly in line with BoJ Governor Kuroda’s view around “one-off” inflationary pressures and no imminent need for a BoJ policy adjustment (Figure 1).
By way of comparison and context, consider the US, where the labor market remains very resilient. Recent policy rhetoric suggests that the US Federal Reserve (Fed) is rethinking its trend-growth estimates (i.e., significantly lower than previously thought), given the lack of increases in labor force supply and productivity. At present, the US economy appears to be further above trend than the Fed previously assumed, making even more policy tightening likely to be necessary to get inflation sustainably down toward the Fed’s 2% target. To that end, the Fed may be inclined to hold rates “higher for longer” and project a higher terminal federal funds rate, even if it signals a slower pace of rate hikes ahead.
As a result, we think the pressure on the BoJ to at least “tweak” its monetary policy strategy relatively soon will keep building. In the absence of such a change in policy, the yen will likely continue to depreciate going forward. On inflation, the consensus view right now is that putting in place heavy energy regulations/subsidies and food import controls would help to keep inflation in Japan lower versus its global peers. However, should the yen stay weak for an extended period of time, Japan’s inflation might prove stickier at higher levels, due in large part to imported inflation (whereby elevated prices for imported commodities cause a country’s overall inflation to rise).
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