Bank of Japan Remains Out of Step with Other Central Banks
June 16, 2023
In a week when the European Central Bank tightened its stance, the Federal Reserve paused but signaled more tightening in the future, and the Bank of Japan reaffirmed a need to maintain its ultra-accommodative stance known as quantitative and qualitative easing with yield curve control, the dollar has risen 1.1% against the yen but also dropped by 1.9% versus the euro and Australian currency, 1.8% relative to sterling, 1.3% vis-a-vis the Swiss franc and 0.9% against the Canadian dollar.
Investors listened to the Federal Reserve’s anti-inflationary message but believe policy-makers are over-stating the downside stubbornness of U.S. inflation and that central bank interest rates will not go as high and stay at peaks as long as the dot-plot diagram is suggesting.
After Thursday’s big rally in U.S. equities, stock futures are little changed prior to today’s open. Note that stock exchanges and banks will be shut Monday for the Juneteenth National Day of Independence. Overseas, equities closed up 1.1% today in Hong Kong and Australian and gained 0.7% in Japan, South Korea and India. Share prices so far today are up 0.4-0.6% in Germany, Italy, Spain and Great Britain. Overnight dollar losses range from 0.1% against the Swiss franc, euro, and Mexican peso to 0.3% versus sterling and are counterbalanced by gains of 0.4% against the yen, 0.2% vis-a-vis the Aussie and New Zealand dollars. and 0.1% against the loonie.
A 1-basis point overnight rise in the 10-year U.S. Treasury yield contrasts with declines of 3, 2, and 1 basis points versus its German, Japanese, and British counterparts.
Bitcoin‘s price is down 0.5%. Prices for gold and oil are respectively up 0.4% and steady.
The Bank of Japan’s Board decision not to change policy settings at this week’s now-completed two-day scheduled review was made unanimously. Previously chronic dissenters on the Board have departed as a result of a recent shuffling that also coincided with retiring governor Haruhiko Kuroda being replaced by Kazuo Ueda. In press conference Q&A, Ueda stressed that the likeliest economic outlook isn’t the sole guide to policy, as officials must also weigh other scenario risks and the consequences of those alternative possibilities. From a policy response standpoint, fighting insufficient inflation is much harder than bringing down excessive inflation. The Board wants to be sure that core consumer price inflation will remain somewhat above the targeted 2.0% threshold in a stable manner before shifting policy gears. Japanese inflation has exceeded that bar for a bit over a year, but amid high uncertainty related to global demand and future Japanese wage negotiations, a patient approach is still warranted. Ueda left vague when the 0.5% ceiling now imposed on the 10-day JGB yield will stay in effect. For now, “The Bank will continue to allow 10-year JGB yields to fluctuate in the range of around
plus and minus 0.5 percentage points from the target level, and will offer to purchase 10-year JGBs at 0.5 percent every business day through fixed-rate purchase operations.”
While the yen initially fluttered and dropped as low as 141.4 per dollar following the Bank of Japan announcement today, the Nikkei-225 equity index climbed further and, at 33607, shows a 31% year-to-date advance. Nonetheless, the index still remains a tad over 13% below its all-time high, and here’s the amazing part. That peak was reached on the last business day of the 1980’s, around a third of a century ago. So when investment experts confidently insist that equities always rise in the long run, know that even in this case there have been exceptions.
Friday has been a light day from a data release standpoint.
Euroland consumer price inflation in May was confirmed as the same as the preliminary estimate of 6.1% (a 15-month low), down from 7.0% in April, 9.2% last December, and 8.1% in May 2022. Core CPI inflation fell less sharply to a 4-month low of 5.3%, having peaked at 6.3% in January but also well above the reading of 3.8% in May 2021. Year-on-year price rises of 5.8% in non-energy industrial goods and 5.0% in service sector things remain way above the 2.0% target of the ECB, much to the consternation of monetary authorities.
A separate euro area data release today showed that hourly labor costs were also 5.0% greater last quarter than a year earlier. Although down 0.6 percentage points compared to the previous quarter, 5.0% represents an acceleration of one and a half percentage points from the reading just two quarters earlier.
Euroland is in modest recession currently, and drops of 0.5% in April and 0.8% in May in the euro area’s indices of leading economic indicators points to a soft rebound.
Croatian consumer prices in May from 0.5% on month and 7.9% on year, their smallest 12-month increase in 14 months. Italy’s consumer price inflation rate last month has been left unrevised at 7.6%, matching March’s 14-month low versus a 37-year high of 11.8% last October and associated with a 6.0% core inflation rate, which remains barely below the record high of 6.3% experienced earlier this year. Austrian CPI inflation has been revised higher to 9.0% in May, having crested at 11.2% in January.
Czech producer price inflation of only 3.6% in May (a 22-month low) was down from 6.4% in April, 10.2% in March and a 30-year high of 28.5% in mid-2022.
New Zealand’s manufacturing purchasing managers index (48.9) printed below 50 for a third straight time in May and for the sixth time in the last eight months.
The U. Michigan survey of U.S. consumer sentiment will be reported shortly. A bunch of U.S. data releases yesterday yielded a smaller-than-forecast 0.3% rise of retail sales last month, an unexpected 0.2% dip that same month in industrial production, mixed signals from the Empire State and Philly Fed June manufacturing surveys, greater-than-predicted new jobless insurance claims last week, drops of 0.6% on month and 5.9% on year in import prices and of 1.9% and 10.1%, respectively, in export prices, another sizable net inflow of long-term capital in April, but $80 billion fewer overall capital inflows (short-term as well as long-term) than in March.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
ShareThis
