A shift in focus from Shinzo Abe could mean the days of ultra-easy monetary policy in Japan may soon be numbered

Japanese Prime Minister Shinzo Abe. Kim Hong-Ji-Pool/ Getty Images
  • Japanese Prime Minister Shinzo Abe has been talking up recent economic growth and labour market outcomes while placing less emphasis on inflation.
  • Deutsche Bank says this could signal a similar shift from the Bank of Japan (BoJ) in the not too distant future.
  • This would be an epochal change for global financial markets.
  • Japanese inflationary pressures are less than half (or a quarter, depending on the measure) of the BoJ’s target, helping to solidify the view held markets that the bank will not tighten monetary policy settings for the foreseeable future.

A recent shift in focus from Japanese Prime Minister Shinzo Abe that has seen him talking up recent economic growth and labour market outcomes while placing less emphasis on inflation could signal the Bank of Japan (BoJ) may soon follow suit, says Deutsche Bank.

If that does occur, it could mean the days of ultra-easy monetary policy settings in Japan may come to an end far sooner than many expect.

“Our economist views this as a clear [shift in Abe’s] monetary policy view,” says Tim Baker, Macro Strategist at Deutsche Bank.

“It’s easy to dismiss this as shifting the goalposts, since inflation is still some way short of the 2% target. But a dive into the data actually makes us think Abe is on solid ground.”

Baker says that while Japanese economic growth, as measured by real GDP, hasn’t been all that impressive compared to other major developed nations in recent years, that fails to take into account that Japan’s population is declining.

“Japan’s growth in nominal GDP per capita (measuring output per person) has actually been quite strong in recent years,” he says.

“Under Abenomics, it’s been roughly in-line with the G10 average, after previously lagging by a whopping 4 percentage points.

“That’s a serious improvement in nominal income for the average citizen.”


And with per capita growth humming along nicely, Baker says Japanese labour market conditions are currently extremely tight with unemployment sitting at multi-decade lows even with participation rates at elevated levels.

“It’s no small feat to have such a low jobless rate when there’s a record number of people interested in working,” he says.

However, despite robust per capita economic growth and tight labour market conditions, that’s been unable to stir Japanese inflationary pressures by any meaningful margin.

According to data released by the Japanese government last month, core consumer price inflation — excluding fresh food prices — grew by just 0.9% in the year to August. And when energy prices were excluded, so-called core-core inflation was even weaker, lifting just 0.4% over the same period.

Both remain well below the 2% annual rate targeted by the BoJ.

Following years of forecasting that inflation would return to target only to disappoint, resulting in constant downgrades, the BoJ still doesn’t see inflation back at 2% by the end of the 2020 financial year.

Even with years of bond and EFT purchases in the trillions of dollars, and with the economy doing OK, it simply can’t get inflationary pressures to build in any meaningful manner.

However, the BoJ has pledged to continue with its policy of buying enough Japanese government bonds to keep 10-year yields at ultra-low levels for “as long as it is necessary for maintaining [its inflation target] in a stable manner”.

In Baker’s opinion, the inability of the BoJ to meet or exceed its inflation mandate may reflect that it’s simply too high to account for structural differences in the process and measurement of Japanese inflation.

“Our economists suggest the 2% target may not be appropriate,” he says. “Their work also suggests the equilibrium inflation rate looks closer to 0.5% per annum.”

However, given Abe’s recent shift in rhetoric to downplay the importance of boosting inflation, Baker says it’s perhaps only a “matter of time until BoJ policy is amended”.

BoJ Governor Haruhiko Kuroda, after all, was nominated by Abe to lead the bank back in 2013.

Should the BoJ follow Abe’s lead as Deutsche suggests, it will undoubtedly have a significant impact on financial markets, especially given widespread expectations that the BoJ is unlikely to make any meaningful changes to policy settings for the foreseeable future.