Hope to See a Policy Move From BOJ This Year: Yetsenga

The VOJ, how interesting of a story is that going to be this year for you? Oh, I think it's a huge story. But maybe it's a 2023 story. They have a window here. I understand the potential new governors' caution about whether inflation is sustained, whether Japan's really hitting the target. Let's see what technicals he puts around that. But certainly the global economy has been supportive. We've still got this resilience in the US and Europe and other parts of the world, which I think is helping to entrench some of that inflation in Japan.

So I hope we'll see a policy move this year, because the window might be a bit more difficult after that. Yeah. Do you think we'll see one? I mean, the reason I say that too is when you look at how other central banks have dragged their feet on their inflation problems, we know how that turned out. I mean, does the VOJ need to move very, very soon is my question. Look, you can make the case for them that they should move very, very soon. I understand their caution. They don't have five or eight years of excessively low inflation.

They have a few decades of excessively low inflation. So I think they really want to be sure that the labor markets responding in the right way, wages are responding in the right way. Corporate pricing structures have adjusted to think more about inflation being around 2% rather than something closer to zero. I know it just doesn't seem like they're quite there yet. Okay. If they're saying that the, you know, what would lead them to normalised policy, if they reach that 2% inflation target and it's stable, what would define stable to you? I mean, does it have to be several months? Does it have to be, you know, I just don't know, right? For them to kind of flip the switch. To be honest, I think we'll kind of know.

I don't know that it's about the months on the inflation data. It's about the picture in the backdrop. And are we seeing the things that you would expect to see to be confident that that inflation will persist at that level? I mean, it can be higher than 2%, but if they don't think the labor markets quite there, or business behaviour is not quite there, then I'd expect them to hold off and stay cautious. They've shown an incredible amount of resilience and patience and resistance to market pressure. I think they want to do this properly. This is potentially a one-time opportunity to exit this period of very low inflation. I think they want to get it right.

I think that's the right thing to do. Let's get to the Fed during the break. You mentioned to us we need to frame this properly. It's not about a terminal rate, is it? And how long we stay there? Well, I think the issue about where's terminal, where's terminal, and certainly investors in Asia this week, Fed and geopolitics, the two big issues, the issue I have with framing it as terminal is it gives this impression that rates go up and then start coming down. And I think the reality is the easing that was delivered through the pandemic and the increases in money supply we saw not just in the US, but a bunch of other economies have been sustained. So most of this interest rate cycle I think is going to be sustained. We can get a bit of an easing next year probably, but it's going to be small and very modest.

So adjusting to a higher interest rate world, much better than what we had pre-pandemic, I think is the dominant theme. And then it begs the question then about this whole no-landing scenario that people are forecasting possibly now, given the data has really been upside surprises. What would a no-landing scenario be? And is that inflationary then, right? If there is no. I can't see how the Fed gets core inflation back to target without a landing. So Jamie Dimon's comments about scary stuff, I mean, I don't know that I'd use that terminology, but we probably need some problems somewhere. We need some stress somewhere to deal with this demand problem, because for sure we know inflation is not transitory. It's not driven primarily by supply or commodities.

Consumers are not going to wilt at the first sign of higher rates. The Fed's got a job and other central banks have a job. And for that job to work, I think you do need some stress, some challenges at some point, even if I would say I think the cycle is going to have a pretty soft landing.

Bank of Japan, Federal Reserve, Inflation, Japan, Monetary Policy, U.S., U.S. Economy, central banks