Japan's Bounce Is a Parable of These Economic Times
In a year of economic surprises, mostly good ones, Japan is right up there.
The decades since the country's asset bubble burst in the early 1990s have seen many false dawns, so no one was rushing to call this a new day. But it's time.
A fair number of economists are now forecasting that the Bank of Japan will begin formally withdrawing from the huge stimulus deployed to combat first deflation and, more recently, too-low inflation. A stealth taper has already occurred: Asset purchases under the BOJ's quantitative easing program totaled about 60 trillion yen in the year through November, short of the annual target of 80 trillion yen.
This one seems to have crept up on us. All of us. I've raised the topic of Japan with central bankers, current and former officials, and investors, and the refrain has always been: "Well, of course, Japan is the outlier; Fed first, then ECB and BOE and, as you know, Dan, Japan is a special case."
True, its problems aren't trivial: Chiefly, a shrinking and aging population and inflation that's about half the 2 percent target. But that is all well documented (translation: the country's many detractors harp on it constantly). Let's look at what is going right: Confidence among big manufacturers is the highest in a decade, exports have increased every month for a year and companies are dusting off their capital-spending plans.
So isn't it time Japan joined the global "stimulus withdrawal party"? (That's the more sober after-party once the punch bowl has been watered down. But it is cause for celebration in its own way!) Japan's QE will continue, for sure, but that may obscure a big shift in the outlook. Purchases will likely decrease to about 44 trillion yen next year, according to a Bloomberg survey of economists. More than a third of the economists also expect the BOJ to raise its target for the 10-year bond yield from the current zero.
Perhaps the surest sign that change is coming is the central bank itself. Governor Haruhiko Kuroda set hearts aflutter in Zurich last month when he indicated that interest rates set too low can harm financial institutions, hampering the conduct of monetary policy. Kuroda tried to walk back any suggestion that such a phenomenon applied to Japan right now.
Not everyone is convinced. Kuroda rarely misspeaks. He knows the value of trial balloons and how investors are likely to respond. He has also spoken about the tactical value of surprising people. After all, he once occupied one of the most sensitive posts in international finance: vice minister for international affairs at Japan's Ministry of Finance. That was in the late 1990s and early 2000s, when Japan intervened regularly in currency markets. It rarely happens now. The famed "Mr. Yen," Eisuke Sakakibara, was his immediate predecessor.
So the world economy ends the year not just with a synchronized upswing in growth, but with the makings of a synchronized exit from easy money. As I have written, trajectories will differ, as do the starting points. It's direction that's important. Each day it becomes clearer and clearer.
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