INFLATION is surging around the globe and central bankers are fretting that growth is running hot, yet officials in the world’s third-largest economy seem oddly relaxed. Has the great post-pandemic reflation skipped over Japan?
A closer look at the data show its recovery has been less than stellar and prospects for walking away from stimulus seem ever more remote.
Figures released Tuesday showed a return to expansion, with gross domestic product increasing at a 5.4% annualised pace last quarter, after a slump in the prior three months.
The gain fell short of forecasts, however, and the economy may again contract in January to March.
Renewed restrictions on social and business activity to constrain Omicron are taking a toll.
The disappointing numbers came after the Bank of Japan (BoJ) stopped speculation that it would loosen control over 10-year bond yields, which it seeks to keep close to zero. Last week, yields climbed within a whisker of 0.25%, the BoJ’s desired maximum.
In response, the central bank on Monday offered to buy an unlimited amount of government debt at a fixed rate of 0.25%, its first intervention of this type in more than three years.
The measure ought to put an end to the idea that Japan, which has battled deflation, might succumb to the global stampede for higher rates.
Such wagers always had an element of whimsy. Japan isn’t shut off from the world, but the inflation surge that’s afflicted the United States and United Kingdom is yet to show up.
In North America, the UK and the eurozone, the pace of price increases is well in excess of targets.
Japan would consider itself fortunate to suffer a pale version of that; the country’s key price gauge probably slowed last month to 0.3%.
Quantitative easing, a feature of Japanese policy for decades, looks embedded.
The BoJ’s flirtation with higher rates in 2000 was a fiasco, forcing officials to quickly reverse and cut. The bank tried again in 2006, nudging the key rate higher, but retreated during the global financial crisis, which began the following year.
While it’s tempting to conclude nothing much has changed in Japan for decades, this stasis could be an asset. Economists, and even some officials, are warning that central banks risk going too far with interest-rate hikes.
They talk about returning to neutral, the level of borrowing costs that neither spurs nor holds back the economy.
But with inflation uncomfortably high, there’s a very real danger that growth will be choked if central banks overreact. In this sense, Japan’s accommodative stance may be ahead of the curve.
Jim O’Neill, a former Goldman Sachs Group Inc chief economist, excoriated central banks for being too lethargic last year in addressing early signs of inflation.
As a consequence, they may now panic and exert themselves excessively. O’Neill told a UK parliamentary committee last week that there are worrying signs of a slowdown.
“It’s quite clear the Bank of England and others should not have behaved as they did in the past two years,” he said.
“They might go completely the wrong way too much, just to get their credibility back.”
Should this damaging scenario come to pass, rate cuts and possibly even quantitative easing (QE) will again be on the agenda.
If so, Japan will have missed the whole middle part of the pandemic economic cycle.
It has happened before: QE was considered an exotic, Tokyo-specific formula until the global financial crisis, when it was adopted in the US and UK. Debt crises in the eurozone cemented its use; Australia and New Zealand dipped in during the pandemic.
We might even start hearing the term Japanification again.
It had become synonymous with failure, because it implies monumental demographic challenges, on-off growth and sluggish price action – and was fashionable to throw around before the pandemic as a warning. But does inflation near zero really look so bad now?
Disappointing or not, Japan might be on the right side of history. — Bloomberg
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. The views expressed here are the writer’s own.