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Is there a solution to Japan’s market chaos?

PotassiumHaruhiko Urata Access to Bank of Japan (Bank of Japan) with a loud bang. After becoming governor in 2013, the former Treasury official fired the bazooka of easy money in an attempt to end decades of economic stagnation.this Bank of Japan Committing to massive asset purchases and introducing negative interest rates in pursuit of a 2% inflation target. Together with Prime Minister Shinzo Abe, Haruhiko Kuroda ushered in a new era of economic policy.

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Kuroda’s term is also coming to an end.Consumer price inflation has been higher than Bank of JapanNine-month target; hit 4% in December, the highest level in 41 years. Officials have been on the offensive – but the Bank of Japan’s “yield curve control” policy, which caps 10-year government bond yields, is facing its most violent pushback since it was launched in 2016. Kuroda’s successor, to be announced in early February, must decide the future of policy and may even oversee rate hikes. This will require deft communication, perfect timing and a lot of luck. Missteps could send the Japanese economy to a standstill and slip back into deflation. They could also disrupt global markets.

The first question facing the new governor is when to put away the bazooka.this Bank of JapanA surprise decision in December to widen the trading range for the 10-year bond yield to allow more trading and improve market functioning was seen as the start of the process.Predictably, speculators tested the target, forcing Bank of Japan Defend the hat.The bank has bought a record 31.5 trillion yen ($243 billion) worth of bonds since Dec. 20, bringing its total holdings to 563 trillion yen, equivalent to more than 100% gross domestic product. At the January meeting, the bank stood firm, but the battle is far from over. In a report dated January 26, International Monetary Fund Urged for more flexibility around trading ranges.

Haruhiko Kuroda is said to be more confident than ever in the BOJ’s dovish tone after returning from the World Economic Forum in Davos.this Bank of Japan Note that higher import costs, especially for energy and food, are driving inflation in Japan. These pressures may soon ease: energy subsidies will reduce costs; signs that global energy prices may have peaked and US inflation appears to be moderating give reasons for caution. On top of that, wage growth has failed to keep pace with price growth: real wages have fallen for eight straight months. The bank estimates that inflation will fall to 1.6% in the financial year starting April 2023 and just 1.8% the following year.

Even a tough successor may have to wait until this year’s ivy (annual salary negotiations) before changing course. Japanese companies have long been reluctant to raise wages. But in the face of protracted inflation, leaders have begun to change their tune. Keidanren Keidanren has urged members to consider the price increase. Some multinationals and large regional companies have promised big wage increases. Fast Retailing, the parent company of clothing giant Uniqlo, announced an increase of up to 40%; Higo Bank, a bank in southern Japan, plans to increase basic wages by 3%, the first increase in 28 years. The question is whether small companies, which employ 70 percent of Japanese workers, will follow suit. under any circumstances, Bank of Japan Officials argue that the cost of too high inflation is lower than the cost of missing a historic opportunity to change Japan’s inflation mindset.

The problem is that the cost of maintaining the current approach will only increase.this Bank of Japan It now owns 100% of some bond issues, leaving traders facing a shortage. Contrary to expectations, the bank found itself buying more bonds than before the introduction of yield curve control.Buying them at their current high prices means Bank of Japan Its portfolio could suffer big losses, especially if it had to sell bonds or raise short-term interest rates. Officials want to phase out yield curve control. That could mean widening the range again, raising the 10-year target or moving to shorter-dated bonds. In practice, this will be difficult. As the experience with pegged exchange rates has shown, policy regimes can shift quickly.

this Bank of Japan There is also the risk of falling behind the inflation curve and having to tighten quickly. Any normalization, let alone rapid normalization, would raise questions about Japan’s fiscal health. Some economists see Britain’s collapse under Liz Truss as a cautionary tale, underscoring the importance of maintaining confidence in government integrity. They worry about unknown unknowns in the financial system. Even so, the Japanese government has announced plans to double military and child care spending, but has offered no credible plan to fund those increases.

who will inherit this mess Bank of Japan? Three current or former lieutenant governors top the list. Masakashi Amamiya, Kuroda’s right-hand man, has overseen the BOJ’s monetary policy for years.As a classical pianist, Mr. Amamiya will bring about Bank of Japansheet music. Hiroshi Nakaso, who served as Kuroda’s deputy for the first half of his tenure, is a financial market expert. He helped fire Kuroda’s bazooka but left arguing that monetary policy was no panacea and that more structural reforms were needed to boost Japan’s growth rate. Hirohide Yamaguchi, who served under Kuroda’s predecessor, has been a vocal critic of the ultra-loose policy. All three are seen as more hawkish than Kuroda, but Amamiya and Nakaso represent a different degree, while Yamaguchi represents a qualitative difference, signaling a clean break with the regime.

The choice falls to Japanese Prime Minister Fumio Kishida. His recent decline in popularity puts him in a weak position within the ruling Liberal Democratic Party. Nominating a figure hostile to “Abenomics,” such as Mr. Yamaguchi, would irritate the powerful faction led by Abe. Whoever is chosen, however, faces a minefield.No candidate has ever led a central bank, let alone faced the likes of Bank of Japan. Tightening too much, acting too early or waiting too long are mistakes with serious consequences. Maybe that’s why all three are said to have shown reluctance.As one government economic adviser whispered: “A job I don’t want is the next Bank of Japan Governor. ”

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