The Magical Land of Low Inflation and No Rate Hikes
Borrowing costs have moved up in the U.K., South Korea, New Zealand and a swathe of emerging markets. There are outliers, however.
(Bloomberg Opinion) -- Bonds are sliding and forecasts for U.S. interest rate increases are escalating rapidly. Borrowing costs have moved up in the U.K., South Korea, New Zealand and a swathe of emerging markets. There are outliers, however. Among them, Asia’s two most powerful economies: China, which cut a key rate this week, and Japan, a country that's battled deflation for a generation and where a top official was unusually defiant in the face of rate hikes.
Even by the standards of enhanced transparency and forward guidance of past decades, Bank of Japan Governor Haruhiko Kuroda's remarks were extremely direct: “Raising rates is unthinkable,” he told reporters Tuesday after the BOJ's policy meeting. A hike in borrowing costs anytime soon was always considered unlikely. Inflation has been below the central bank's 2% target for years. The slight mark-ups in the bank's projections this week still wouldn’t prices within striking distance of the long-elusive goal in the foreseeable future.
Monetary leaders usually leave themselves some wiggle room, lest unforeseen developments require a change in course. More so today, when inflation in many economies exceeds the desired level. U.S. Treasury notes have sagged amid speculation the Federal Reserve may have to hike rates by half a percentage point as soon as March. The prospect of any increase that month only recently came onto the radar.
Was it necessary for Kuroda to be so categorical? What he probably meant is that, should accommodation need to be withdrawn, he won't be the guy to do it. His second five-year term ends in April 2023. A new chief can oversee a change of direction, assuming underlying economic conditions warrant one. In practical terms, Kuroda only needs to talk about the coming year.
His bluntness does serve two broader purposes, however. First, Kuroda is underscoring that not every institution is a carbon copy of the Fed, Bank of England or even the Reserve Bank of New Zealand. The hawkish thrust that looks set to define 2022 has important exceptions. China announced its first rate reduction in almost two years Monday, minutes before figures showed a marked slowdown in growth at the close of 2021. Japan, like China, is doubling down on its tussle with Covid-19, while other powers move toward a kind of co-existence. The government is poised to put greater Tokyo and other parts of the country under a state of quasi-emergency for several weeks, according to national broadcaster NHK.
Second, Japanese policy makers would probably be relieved at the prospect of inflation approaching, let alone breaching the target. Pushing the pace of price increases higher has been an objective for the better part of three decades. The BOJ's failure to do so on a sustained basis has contributed to the caricature that Japan is destined for long-term decline. If the global tide leads to a pickup in inflation and requires restraining the economy, that’s fine. Don't get in the way.
Not that Japan is completely insulated. The bank took a more robust view of inflation risks for the first time since 2014 and raised its forecasts. But only marginally: Consumer prices are predicted to advance 1.1% in 2022 and 2023, up from a previously estimated 0.9% and 1%, respectively. Hardly earth-shattering when you consider the Fed's preferred gauge of inflation jumped to 5.7% in November.
You can't blame Kuroda for his view. On a few occasions, he was broadly expected to start laying the groundwork to dismantle stimulus. In a November 2018 speech, for example, Kuroda came close to declaring the end of deflation and the dawn of a new era. A global slowdown and an escalating trade conflict between Washington and Beijing burst that thought bubble.
As he enters the home stretch of his term, perhaps Kuroda's last service will be to remind the world that not every economy moves in lockstep. Things really may be different in Japan.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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