Hawkish Fed spells out its stance while BOJ pursues its policy errors

As we have been outlining in our publications through the last two months, hopes for easier monetary policy next term seemed misplaced given the broadening of inflation through the service sector, general wages and housing costs that seem insulated from the supply-side disruptions caused by the effects of the pandemic. Indeed, as we have argued, the drop in US longer term rates below 3% had become a problem for the central bank which had not communicated its intentions clearly enough to fight inflation, until now. 

With the war in Eastern Europe dragging on, energy and food prices which many had hoped will help lead inflation rate lower now look fairly likely to remain elevated with first sign of dreaded rice export bans starting to appear in Asia. With longer term inflation projections starting to rise, hopes of low interest rates returning so soon seemed wishful given the global headwinds that also include Cold War’s de-globalisation trend which has its own inflationary impact.

But what stood out from Jackson Hole was BOJ, reiterating its super easy stance with Kuroda-san claiming it was the only policy option left for Japan as wage growth has yet to take hold while he continues to deem inflationary forces in play as mainly transitory. With structural labour shortages in Japan likely to become problematic as Covid-related restrictions are eventually fully lifted and Kishida’s government is pushing up minimum wage, we think even BOJ’s conditions for more meaningful wage growth will likely to appear by next term, leaving no reason at all to continue with its failed monetary experiment. 

Kuroda dismissed the recent trends labelling Japan’s rising core inflation rate, now at 2.4%, as miraculous and one that is unlikely to last. However, we continue to believe that the outgoing BOJ chief is grossly misreading the global inflationary pressures which is also engulfing Japan as we see prices rises there broadening much further, possibly towards 5% by next year. 

However, with Mr Kuroda likely to be thinking more of his legacy as we approach the end of his tenure in April next year, it does seem BOJ’s policy errors of suppressing JGB yields near zero will continue for now. This will likely to be further hurting the value of the yen which could still manifest into an Asian currency contagion and spill over to other EMs. Interestingly, Bank Of Korea’s governor, Chang Yong Rhee voiced his concerns about the weak yen at Jackson Hole, pointing out that it has become a huge headache for the central bank.