BOJ's (Koruda's) Fight
Macro Perspectives
The Bank of Japan held its ground. They kept key short term rates negative and they maintained the cap on their 10-year government bond yield at half a percent.
So, Japan continues with pedal-to-the-metal stimulative policy, even as inflation is running at four decade highs. And even as the rest of the world is well into tightening campaigns.
What did the BOJ governor have to say?
He said he wouldn't hesitate to ease further if necessary.
He said it's important to support the economy.
He said it's important to encourage companies to raise wages.
These are three diametrically opposite initiatives of that of the rest of the Western world.
The Fed has threatened to tighten more (err on the side of too tight), has explicitly worked against the economy, and has outright wanted to suppress wage gains.
For context, it's important to remember that Japan has been attempting to reverse nearly three decades of deflation. Former Prime Minister Abe was elected 11 years ago on the promise of ending the economic malaise and a deflationary vortex that had troubled Japan for more than two decades. He hand-selected a governor of the Bank of Japan (Haruhiko Kuroda) to execute an all out war on deflation.
So Kuroda is not going to let up (not on his watch). After dealing with three decades of deflation, he's going to let the economy run hot. He's focused on preserving standard of living (against inflation) by encouraging wage growth. Meanwhile, hot nominal growth solves a lot of problems - it's a recipe for inflating away the government debt burden (Debt/GDP goes down).
It's a logical game plan. And it's a game plan the Fed and Treasury appeared to be executing in the early response to the pandemic shut-down. They erred on the side of being over-aggressive. They printed and they spent, and they restored economic output inside of a year. They stoked hot nominal growth, which inflates away the debt burden.
But then the political pendulum shifted, and restoring economic prosperity was abandoned for the global climate agenda.
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