Central bankers just can’t make up their minds it seems.
A bit of a stockmarket rally and the Federal Reserve is back talking big about raising rates again. I’ll believe it when I see it.
But it’s not just the US central bank that’s been surprising investors. The Bank of Japan did the same thing on Friday.
Lots of investors had hoped for more money printing from Japan, what with inflation remaining well below target. Instead, they got more of the same – the Bank of Japan will keep printing a mere 80 trillion yen a year until 2017.
So is Japan’s comeback dead in the dirt? Or is this just the beginning of a new phase?
Why didn’t Japan print even more money?
Japanese central bank governor Haruhiko Kuroda surprised a few people on Friday when he decided not to do even more money printing than he’s already doing.
Kuroda’s goal is to get inflation back up to 2% a year. Yet while Japan’s stock market has soared since he started printing yen, and the yen has weakened from less than 80 to the dollar to around 120, the economy has had a tough year this year.
For one thing, inflation is back below 0% on the headline measure. For another, economic growth has been weak. And in fact, the central bank has lowered its growth forecasts for the next two years.
Given the backdrop, you might expect Kuroda to be ramping up the money printing already.
But it’s not as clear cut as it looks. For a start, you have to consider that Japan has already printed a colossal amount of money. As Reuters notes, Japan has so far spent “equal to about 70%” of its GDP. That compares to 25% of US GDP for the Fed and 20% of UK GDP for the Bank of England.
In other words, there isn’t a more active central bank out there right now. You can’t take this much further without getting to the point where the central bank has to admit that it’s simply printing money for the government to spend – at least, that’s what would become clear once the Bank of Japan owned the entire Japanese government bond market.
It’s little wonder that Kuroda might feel concerned about doing that.
But more to the point, it might not be necessary. The thing is, the economic data from Japan actually looks pretty healthy when you dig into it a little.
For a start, as Capital Economics points out, unemployment is at just 3.4%, and in September the job-to-applicant ratio (ie, the number of jobs available per jobseeker out there) rose from 1.23 to 1.24.
In other words, there are more jobs than there are people to fill them. And this is the highest the ratio has been since 1992. “This suggests that the jobless rate will fall towards 3% in coming months.”
A job market that tight should put pressure on wages to rise. If employers are competing for labour, it’s only logical.
Meanwhile, if you ignore collapsing energy prices, then inflation is above 1% a year. Sure, it’s hardly rampant price growth but it’s a lot higher than Japan is used to. And consumer spending is starting to pick up again after it took a knock due to higher VAT being imposed last year.
So you can see why Kuroda might be a little more optimistic than surface analysis might suggest.
The next step in Japan’s long road to recovery
The point is, there’s a lot more to Japan’s comeback than mere money printing. So what’s next in terms of Japan’s market? As the FT’s Lex column puts it, the collapse in the yen so far has been good news for Japanese exporters’ profits. However, that should be just the start.
Rising profits should result in “more corporate investment in pursuit of higher profits”. More investment means more jobs, better wages and therefore “freer-spending households”.
That means that future profits shouldn’t come from an ever-weaker yen, which would be unhealthy in any case. Instead, the focus will be on the companies that can benefit from a domestic revival, such as “construction or utility stocks”.
MoneyWeek regular and Asia expert Rupert Foster recently gave us his views on Japan’s next steps in the magazine, with some broadly similar conclusions on the yen. But Rupert also points out some of the huge structural changes happening that should mean that this is genuinely the dawn of a new era for Japan. If you missed it, you can catch up on his views and ways to invest in the country. If you’re not already a subscriber, sign up now.