BNY Mellon: The Aerial View: False Dawns

BNY Mellon: The Aerial View: False Dawns

By Neil Mellor, Senior Currency Strategist, BNY Mellon

Just two months ago, we felt that the Japanese economy had entered a more promising phase in the quest for self-sustaining recovery; but global trade disruptions may have played their part in signs of another false dawn. The BoJ must tread carefully.

Almost one year ago to the day, officials were purposefully dropping hints about a move away from crisis-mode stimulus. And although well aware of market sensitivity to the slightest perceived shift in policy, the Bank’s longstanding concern about the distortive nature of low–for-long interest rates prompted it to engage in a modest ‘tapering’ of its asset purchases. We now know that the BoJ’s balance sheet has shrunk in three of the past seven months.

That economic trends indispensable to a self-sustaining recovery began to materialize in the autumn was undeniably a boon to this process of normalization. But then, we recognized that any optimism must always be seen in the context of multiple false dawns over two lost decades; and so it is that the latest run of figures appears to belie the positivity that appeared eminently justifiable just a few weeks ago.

Compelling evidence arrived with September’s coincident index: the government downgraded this ‘stalling’ series for the first time since May 2015 and we find one or two components of this index particularly troubling.

While the benefit of the doubt must be given to today's earthquake-hit machinery orders figures, real wage growth appears to have gone into reverse after promising signs over the summer – wages have now fallen for two consecutive months. And c learly, this bodes ill for consumer spending.

Certainly, real wage growth may yet resume if inflation falls back, but then, this would be of limited consequence: the inflation sought by the BOJ is the product of wage growth’s contribution to stronger demand relative to supply, not the product of fluctuating energy prices.

Meanwhile, reflecting the external risks recently highlighted by the BoJ, exports have recorded their first year-on-year drop since November 2016. And there can be no question that global trade disruptions are playing their part: exports to China fell by 1.7% while shipments to the US dropped 0.2%.

As with the machinery orders data, t here are mitigating circumstances, certainly, and this alone may mean some recovery in shipments in the months ahead; but trade squabbles constitute risks to Abenomics over and above those posed by direct trade links.

Indeed, as the recent slide in stock prices can be attributed in part to the trade issues cited by almost all central banks as a major risk to their projections, there is every risk of the JPY appreciating sharply if these frictions were to go unchecked, and with all the negative implications for Japan’s export this would have.

The frustrations are all too apparent: both Haruhiko Kuroda and Yukitoshi Funo spoke openly this week of the drawbacks to large scale monetary stimulus.

But if the Japanese economy is indeed suffering an all too familiar slowdown, then the status quo of ultra-accommodative monetary policy will not only remain the lesser of two evils, but one – just as Kuroda acknowledged a few months ago – that may have to be embraced anew if the risks the BoJ has highlighted threaten to materialize.


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