Monetary policy in Japan has got into a bit of tangle.  Back in 2016 the Bank of Japan announced that in addition to managing asset purchases and interest rates on deposits, it would also target yields on long term Japanese government debt. The target was a yield of 0% and since then yields on ten year bonds have been anchored at this level.  Arguably this has been a success, but on the other hand a consequence has been the level of asset purchases falling, resulting in the so called “stealth taper” and thus a reduction of monetary stimulus which was unlikely to have been the bank’s intention.

Maybe as a consequence of this slightly contradictory policy, the Bank of Japan at its most recent meeting announced that it would allow a greater volatility in the yield on ten year bonds, with the yield now being allowed to rise as high as 0.2 %.  Quite why the bank decided to do this is difficult to read.  Maybe bowing to pressure from the banking sector that would like a steeper yield curve; possibly a desire to inject a little more volatility in the bond market; or perhaps a very small signal that monetary policy can be tightened?  But does Japan need higher rates?  On the face of it – no.  Inflation is still low and although the economy is reasonably firm, higher rates are likely to strengthen the Yen which may act as a dampener to activity.

However, there is one bright spot on the horizon.  Wages in Japan are now rising faster than at any other time over the last 20 years.  Not only that, the rate of increase is rising faster than in other major economies.

Annual Wage Increase (%) 2018 Annual Wage Increase (%) 2015 Change (%)
Japan 2.1 (May) 0.7 +1.4
United States 2.6 (Q1) 2.3 +0.3
Eurozone 2.0 (Q1) 1.5 +0.5
UK 2.6 (May) 3.2 -0.6

The increase is now notable and could be a precursor to the end of the deflationary era in Japan – something we will be watching very closely.

If this is the case then we can continue to expect much more speculation over Japanese monetary policy and much more volatility in bond markets worldwide.


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