BOJ’s policies likely to sink Japan’s government and its economy in 2023

With Japan’s inflation rate approaching its 40-year high, more market participants are coming round to our view that BOJ’s ongoing policy errors have set the stage for a major showdown between the central bank which has suppressed long term rates by its aggressive quantitative easing and investors who believe JGBs have become notably mis-priced as global rates head higher. As has been the case for much of this year, the Japanese currency has paid the price for this with the dollar/yen rate having briefly breached the 150 level, its highest point for over 32 years, before another round of currency intervention late on Friday pushed the rate back down. 

As we have long underlined, this dual intervention by Japan’s economic policy makers in suppressing long term rates on one hand while at the same time trying to stop the yen from weakening further on the other is likely fail in both their objectives. Much of the blame lies with BOJ’s governor, Kuroda-san whose monetary policy experiment of the past 10 years has been an utter failure, not only in its attempt to spark any sort of sustained wage growth but it has caused much damage to Japan’s financial industry and its pension system. 

With Kuroda’s term expiring next April, his only concern seems to be to preserve his legacy of his unorthodox monetary policies which have led to BOJ owning close to 70% of outstanding JGBs and over 60% of Japan’s Nikkei stocks. Meanwhile, the resulting weak yen has only raised the scope for more imported inflation and widening trade deficit. Moreover, with falling demand for goods overseas offsetting any positive effect from the weaker yen on Japan’s exporters while rising food and energy prices continuing to eat into Japanese household incomes, we would not be surprised to see Japan falling into a recession next year. 

What is ironic is that although in the UK, the sinking of Liz Truss’ short lived government was blamed on the British prime minister not listening to her economic experts and BOE, in Japan the likely potential downfall of Kishida’s government could stem from abiding by BOJ’s recommended policies. With Kishida-san’s approval ratings in the polls falling to below levels that sunk Suga’s government this time last year, anything short of a nuclear conflict with Russia or a military standoff with China that could boost his government’s standing is likely to lead to his downfall by next year we think.