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Markets’ Magical Thinking on China Has Extended to the BOJ

A pedestrian in front of the Bank of Japan (BOJ) headquarters at dusk in Tokyo, Japan, on Wednesday, Oct. 26, 2022. Bank of Japan Governor Haruhiko Kuroda appears as determined as ever to see out his inflation mission without buckling to market or political pressure. (Bloomberg)

When it comes to future developments in Asia’s biggest economies, the market can’t help setting itself up for disappointment. 

For months now, traders have tied themselves in knots over when China might exit from Covid Zero. They first expected the country to let up after the Winter Olympics were over, then after October’s National Congress and coronation for Xi Jinping’s third term. Now, some see it happening perhaps in spring next year, if you believe screenshots shared online. All the while, the message from policymakers has been unmistakable: there’s no change coming. 

A similar expectation has crept into thinking around the Bank of Japan. An exit from negative rates and/or yield-curve control was inevitable (many said) earlier this year as the yen weakened. When that failed, surely when the currency tumbled to 150 against the dollar. Well if not then, certainly when Governor Haruhiko Kuroda’s replacement arrives next April. 

All the while, the message from policymakers has been unmistakable: there’s no change coming. 

With Kuroda having convinced markets that he’s not going to veer off course, expectations have grown that a shift will happen under his successor. Media focus in the months ahead will move to who’s likely to win the five-year term. Current deputy governor and yield-curve control architect Masayoshi Amamiya is seen as the frontrunner, and former deputy Hiroshi Nakaso is also a leading candidate. 

But if there’s to be “Amamiyanomics” or “Nakasonomics,” they likely won’t reveal themselves in a hurry. Consider the economic situation in April when the new governor settles in: Recessions are widely anticipated in the US and Europe. The Federal Reserve is likely to be past its tightening phase. And China’s lackluster performance will be particularly painful. 

In recent decades, the world could usually rely on Chinese growth to stop global slowdowns becoming calamities. The 2020 Covid slump was an exception, though even then China had a powerful rebound. That’s since petered out, and the country’s expansion this year won’t come close to the official projection of around 5.5%. Few economists see China making great strides next year if Covid Zero stays. But as much as it will curtail growth at home and beyond, it would certainly vindicate Kuroda’s insistence on staying the course. More than that, it could tie his successor’s hands until well into their term.

What if Covid Zero does vanish and Chinese growth picks up, boosting the world economy — would that clear the way for change in Japan? It’s a mistake to assume that new central bank chiefs bring with them an agenda for reform on day one. When Ben Bernanke became Fed chair in 2006, the sense was his priority would be formalizing an inflation target. He did that — but not for six years and along the way he had to fight a global crisis. The incumbent Jerome Powell was considered a dot-plot skeptic, but has found handy uses for interest-rate projections. Mario Draghi had been president of the European Central Bank almost a year before he pledged to do “whatever it takes” to resolve a debt crisis.

What’s more, by the time Kuroda’s successor is in place, events at home will be in focus, with the results of the spring shunto wage negotiations only just starting to filter into the economy. Any new governor is unlikely to risk what might finally be a breaking of the deflationary mindset, and will be hoping the wage talks lead to the long-hoped-for virtuous cycle of increases in both salaries and prices. Amamiya signaled this in a July speech, flagging the need for wages to rise faster than inflation, but noting his fear that won’t happen this year. 

The last thing a central banker wants to do if unconvinced of inflation’s staying power is tighten into a pronounced slowdown — even more so if wage growth is slow to come. “The risk is that the global growth environment deteriorates before a change in the BOJ’s hoped-for inflation dynamics set in,” wrote BofA Securities economists Izumi Devalier and Takayasu Kudo in a recent note. 

All of this explains why most economists see change as unlikely, with more than two-thirds expecting an adjustment in the 10-year JGB yield target, currently at around 0%, coming either later than 2023 or not at all. Fully half say the same about even a tweak in the language of forward guidance toward tightening. And fundamentally, Japan’s inflation, running much lower than other countries, makes the case for action much tougher, regardless of where the yen might be next April. 

“People say the BOJ is an outlier, but the BOJ’s monetary policy judgment is not an outlier,” former board member Sayuri Shirai explained to us last week. She pointed to the low rate of underlying inflation, as well as corporate and household expectations that its pace will decline, as reasons why the BOJ is right to stay the course. “If other central banks were in Japan’s case, they’re not going to raise interest rates,” she said. 

Circumstances tend to guide actions in office rather than pre-baked solutions. And if listening to the people who are likely to make the decisions isn’t enough, a handy gut check can be had in Beijing. China may well be looking for an off-ramp from the most draconian aspects of its no-Covid policy. But if the substance of the approach sticks around next year, as opposed to a few nips and tucks, chances of a shift at the BOJ look close to zero too.

More From Bloomberg Opinion:

• Kuroda Can’t Get to Yes. Should He Try?: Moss & Reidy

• Is the Great China Covid Reopening a Myth or a Must?: Shuli Ren

• Believe Japan’s Acceptance of a Weak Yen: Moss and Reidy

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 economics.

Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.

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