Interest rates may be rising around the world or about to rise in the case of Australia next Tuesday, but not in Japan where the country’s central bank has made it very clear there will be no change, even if inflation is rising as it is right now.
The Fed, Bank of Canada, Bank of England and a host of other smaller central banks have lifted rates this year – the Reserve Bank of NZ already has four increases under its belt.
The European Central Bank remains on the sidelines but seems to be edging towards a rate rise later in the year but China’s central bank has been easing monetary policy and will continue to do so as the economy is battered by Covid and weak demand.
Next Tuesday the Reserve Bank of Australia is tipped to start lifting our rates and a day later the Fed is expected to lift its key rate a second time in as many meetings – this time by a large 0.50%.
Not even the surprise 1.4% (annual) contraction in the US economy in the March quarter, will change the Fed which is in a inflation-bashing mode.
GDP contracted after the 6.9% surge in the final quarter of 2021 and the sharp turnaround came as a shock, yet Wall Street surged as investors mistakenly thought the fall in growth would see the Fed ease off on what is expected to be a series of aggressive rate rises this year.
Analysts had been looking for a 1% rise and they, too, were surprised by the size of the slide which was blamed on the weak first quarter trade performance, low investment and low defence spending, as well as weaker business stocks.
But then Apple and Amazon both talked down prospects because of rising inflation, supply constraints, product and component shortages and weak demand for Apple in China, its most important growth market and source of new phones, computers and the like.
The fall in GDP actually matched the spottiness of the first quarter earnings season which apart from energy, is showing more than a few signs of tired revenue and earnings momentum as rampant inflation eats away at margins and consumer demand.
The record trade deficit will remain a key variable with the weakness in the yen and the euro pushing the value of the US dollar to new five-year highs this week as the prospect of a Fed rate rise drags the currency higher. That rise in the dollar will add downward pressure on import costs, and chip away at inflation.
It’s the current inflationary pressures (which may be now peaking) that will keep the Fed on its current course of a significant tightening in monetary policy.
But in Japan a rate rise will never happen, or so it seems as Thursday saw the Bank of Japan (BoJ) drive the value of the yen to a 20 year low against the US dollar as any suggestion of looking to follow the Fed and lift interest rates was very firmly ruled out.
The yen fell by nearly 2% to more than 130 yen to the dollar, the lowest it has been since 2002 when the global economy was recovering from the tech and net boom and crash.
Unlike all its peers, the Bank of Japan made it clear that it will not allow rates to move higher from its current ultra-low stance, despite rising upward pressure as rates rise elsewhere around the world, inflation rises and there’s little chance of that changing in the next few months.
The Bank of Japan left its key short-term interest rate unchanged at -0.1% and that for 10-year bond yields around 0% at its April meeting, by an 8-1 vote, as expected.
The central bank said it will offer to buy unlimited amounts of the bonds to defend an implicit 0.25% cap around its 0% target every market day.
Within hours of the BoJ’s policy decision on Thursday, the yen fell to ¥130.62 against the dollar, the lowest level in two decades and the lowest level in real terms since the early 1970’s.
The BoJ believes Japan’s underlying economy is too fragile to tighten monetary policy, but it risks upsetting politicians and the public as the weak yen drives up the price of imported goods, and nudges inflation higher.
The dramatic fall by the yen spilled over into other currencies – the Aussie dollar eased to a six-week low against the greenback, the Kiwi dollar fell and the US dollar index rose close to the highest level it has been since 2017.
In its usual quarterly outlook report, the BoJ said Japan’s economy was projected to grow more slowly, amid headwinds from a resurgence in COVID-19 cases and a rise in commodity prices due to the war in Ukraine.
The bank cut the its 2022 GDP growth forecast for Japan to 2.9% from the 3.8% estimate made in January and slashed the 2021 financial year (which ended March 31) GDP growth to 2.1% from 2.8%.
The falling yen will make imports more expensive – especially key energy commodities where price rises have already boosted inflation to un-Japanese levels of close to 2%.
Retailers are also feeling the pain but key export industries like software, computer chips, cars and car parts and a host of consumer products will see their prices become more competitive in offshore markets.
The rising cost of commodities and other imports is why the BoJ forecast inflation for the FY 2022 would rise to 1.9%, just short of the long held but never achieved 2% target of the central bank, from the previous forecast of 1.15, just six weeks ago.
The 1.9% forecast would mean the bank is predicting the highest price growth in three decades outside the sales tax hike years of 1997, 2014 and 2019. Japan’s CPI was up 1.2% in the year to March, the highest it has risen since late 2018 and high by recent Japanese standards.
But the rise in inflation is forecast to tumble back to 1.1% in the 2023 financial year, wiping out what amounts to a brief upward blip.
The BoJ kept overnight interest rates on hold at minus 0.1%. It said it would conduct daily purchases of 10-year bonds at a yield of 0.25%, showing no willingness to let bonds trade in a wider band. The move is similar to the yield control measures the RBA used to keep the cash rate steady at 0.10% for three years but had to abandon. in Japan, no such easing.