Bank of Japan governor Haruhiko Kuroda has set the wrong inflation target and is impoverishing households with quantitative easing (QE), yet will likely extend these policies further, fears CLSA global equity strategist Chris Wood.
Speaking at a media lunch in Hong Kong this week, Wood pointed out that deteriorating data in East Asia, particularly China, had policymakers in Tokyo worried and would likely be the trigger point further QE.
Part of the problem is that Kuroda has set an inflation target of 2% that includes energy, which amid a tumbling oil price is proving problematic, Wood observed.
“The problem here is that his [Kuroda’s] face is on the line because he has talked up the wrong target,” stated Wood, who had earlier been lambasting QE in the US for driving up asset prices but failing to spur economic growth, as reported.
He noted that technically deflation had ended in Japan as its labour market was tightening and had been for several years because the working age population was declining. Fewer workers means more pricing power and rising wages.
He pointed out that some measures of inflation in Japan were actually looking healthy (see chart), with real inflationary pressures between 0.5% and 1%.
“If he [Kuroda] had a 1% inflation target, which he should have, he could then say the BOJ was almost there,” said Wood.
“Deflation has ended in Japan in terms of income growth having stopped going down. Of course, a declining oil price is good news for Japan’s economy [as an energy importer], but Kuroda has his target including oil.”
Wood, in fact, was highly critical of Kuroda’s tenure since he was appointed BOJ governor in March 2013 in the wake of the election of prime minister Shinzo Abe.
“People think Japan’s experience has been awful since the 1990s [two decades of deflation], but the bad side to Japan is it took so long to address its banking system and allowed zombie corporates to stay around for too long,” he said.
He pointed out that by the measure of GDP per working age population in US dollar terms, Japan had been ahead of the US consistently from 1994 to 2011 (see chart).
He said he was staying overweight Japan on the grounds that deflation was ending even before the BOJ started administering its QE medicine to the market.
He observed that since Kuroda had arrived at the BOJ, his QE policies had been good for the Topix in yen terms – and for macro speculators – but bad for long-only investors who can’t hedge and disastrous for Japanese households.
“There has been a 25% devaluation of the yen against the dollar, so he [Kuroda] has impoverished Japanese households,” said Wood. “What’s good about that? That is why more QE will be very unpopular among Japanese households and small and medium-sized enterprises.”
On the prospect of further QE, he suggested Tokyo had become scared about a slowdown in the economic growth of China and East Asia more broadly, pointing out 50% of Japanese exports went to Asia. “The trigger for more QE will be external deterioration and a stock market downturn,” said Wood.
“But just like elsewhere, you see in Japan that asset prices have gone up and capital values of real estate have gone up a lot, but rents have barely gone up at all, which highlights the fact QE boosts asset prices, while the domestic economy that reflects rents has not seen the same pickup.”
He added that policymakers in Tokyo were also nervous about buying more Japanese government bonds (JGBs) since they were buying so many already.
“They do not admit to worrying about it formally, but it is quite obvious they are because liquidity has collapsed in the JGB market,” Wood said.
He highlighted three things policymakers might look to implement: expanding ETF purchases; and following in the footsteps of European Central Bank president Mario Draghi by stopping paying interest on bank balances with the BOJ and cutting the deposit rate below zero, discouraging banks from parking money for safekeeping.