This week's weekly: Fair Powell Fed vs. Unfair Ueda BOJ

 

This week's weekly: Fair Powell Fed vs. Unfair Ueda BOJ

 

 

November 6, 2023

 

 

US stock market, biggest weekly increase of the year following FOMC and October employment statistics!

 

The US stock market posted its highest weekly gain in 2023 (approximately 6%) last week. This was triggered by the FOMC meeting held in the first half of last week, which left the US policy interest rate unchanged for the second time in a row, and the weekend employment statistics for October, which modestly weakened the sense of tight supply and demand in the labor market.

 

With the slight exception of the Trump administration, my belief that the U.S. stock market will continue to be the best-performing global financial market over the long term has rarely wavered. (See my book “Introduction to Long-Term Investment in American Stocks'' (Diamond Inc.) published in 2010).

 

Simply put, the biggest reason for this is that the United States, which has evolved and developed competitive market capitalism while firmly upholding a political system of freedom and democracy based on fundamental human rights, is the only country that will continue to lead the world economy and the international financial market.

 

However, the dramatic rebound in US stocks last week may be too good to be true. Previous concerns such as geopolitical tensions and fears of a U.S. government shutdown appear to have completely disappeared from the market this past week.

 

In any case, the short-term ups and downs of the U.S. financial market are only known to God. Or, in Buffett style, it might just depend on Mr. Market's mood.

 

 

A dovish market reaction could fuel a hawkish counterattack

 

By the way, former Treasury Secretary Summers said on Bloomberg Wall Street Week last weekend, “It seems a little too hasty to declare that we've done all the monetary policy we need to do.'' he said.

 

"Even with the very dramatic response we've seen, I'm not as convinced as many people are that the job of controlling inflation is done," he said, referring to last week's rebound in U.S. Treasuries and stocks. showed recognition.

 

"Although the labor market is no longer as overheated as it was a few months ago, I still think it's highly questionable whether we're in a position consistent with a sustainable 2% inflation rate," he said.

 

Additionally, when it comes to rising long-term interest rates, Summers said, "I don't have confidence in the central element of the Federal Reserve's thinking that monetary policy easing can be seen as a contractionary factor for which the appropriate response is."

 

Indeed, one of the reasons why the October US employment report was lower than market expectations may have been the impact of the United Auto Workers (UAW) strike.

 

In any case, this morning's article from Blumberg says, “Following Fed Chairman Jerome Powell's press conference and the downturn in employment statistics, there is a clear recovery trend in both U.S. stocks and bonds due to expectations that interest rate hikes will be halted. As a result, if financial conditions loosen, the view that rising government bond yields will act as a substitute for further interest rate hikes may be undermined,'' said Jim Reid, head of Western credit strategy at Deutsche Bank. He cites this and explains that if the dovish market reaction continues, “it could fuel a hawkish counterattack,'' but I have to say that these statements are quite persuasive.

 

 

Fair Powell Fed

 

However, while the Powell Fed initially failed to recognize the acceleration of U.S. inflation and was significantly behind the curve, after the Jackson Hole Fed seminar in the summer of 2021, it achieved a shift from being a "team transitory" position, and especially from May 2022 onwards. has carried out large-scale interest rate hikes in succession, raising the (nominal) policy interest rate to 5.5% against the current inflation of about 4%, and has sufficiently recovered the real policy interest rate into positive territory, thereby reducing inflation. The Powell Fed is beginning to meet the necessary condition for disinflation towards 2% inflation target.

 

Powell's Fed's policy stance that the US economy is still overheating, especially in the labor market, and that interest rates may be raised depending on the data, is at least not severely criticized as being behind the curve. It's no exaggeration to say that.

 

With regard to inflation and sustainable economic growth, the Fed has been implementing a fair, transparent, consistent and rules-based monetary policy.  Although it is still uncertain whether or not the Fed will be able to successfully achieve a soft landing towards the twin missions smoothly, only the most extreme cynics would doubt the Powell Fed’s sincere efforts being made to steadily reduce inflation.

 

 

October consumer prices in Tokyo wards increase for the first time in four months

 

I cannot help but think that the bigger problem is Ueda Bank of Japan and the Japanese economy. Japan's media coverage is also no small problem.

 

Last week, the Nikkei Shimbun reported, “The Ministry of Internal Affairs and Communications announced on the 27th that the consumer price index for the wards of Tokyo for October (preliminary figures in mid-year, 2020 = 100) was 106.0 compared to the previous year, excluding fresh food, which is subject to large fluctuations.

 

Although it increased by 2.7% compared to the same month over the previous year, the growth rate had slowed for three consecutive months until September, but it has expanded from the previous month for the first time in four months. Indeed, the same newspaper says, ``The government's electricity and gas subsidies were cut in half, pushing up the overall figure.''   The mid-month preliminary figures for the Tokyo and wards are considered a leading indicator for the nation for the same month.

 

In contrast, Blumberg points out that month-on-month comparisons show that inflation is accelerating considerably. For example, compared to the previous month, the overall CPI, core CPI, and core-core CPI have significantly accelerated inflation by +0.9%, +0.7%, and +0.3%, respectively.

 

From an economic perspective, month-on-month changes are more important than year-on-year changes. The latter is similar to the concept of differentiation in algebra.

 

In any case, on a core-core basis excluding fresh food and energy, which are not affected by the government's electricity and gas subsidies to businesses, consumer prices in Tokyo's wards increased by 0.3 from the previous month in October, which corresponds to +3.6% multiplied by simple 12 months, and it is certain that it continues to exceed the 2% inflation target by a large margin.  The core-core CPI has continued to exceed 4% year-on-year for more than half a year from April to October in FY2023.

 

Under these circumstances, if the Bank of Japan continues to maintain a negative policy interest rate and allows the real policy interest rate, which takes inflation into account, to remain at a significantly negative level, it will lead to further acceleration of inflation and further amplification of asset bubbles. It is no exaggeration to say that it is reckless and extremely dangerous monetary policy for Japan.

 

 

Monetary policy revisions are insufficient to control prices

 

At the end of October this year, the 9th anniversary of the infamous Halloween bazooka that erupted in 2014, the Bank of Japan made another small adjustment to its large-scale monetary easing policy. The upper limit on long-term interest rate fluctuations had just been effectively raised in July, but the upward pressure on interest rates was stronger than expected, forcing the Bank to re-revise it in just three months.

 

In any case, even after this slight adjustment at the end of October, there is no change in the fact that the Bank is continuing its unusual monetary easing policy, which guides short-term interest rates to -0.1% and long-term interest rates to around 0%.

 

However, long-term interest rates are allowed to fluctuate to some extent, and in July they raised the upper limit from the previous 0.5% to 1%, but this time they will also allow a certain amount above 1%.

 

Towards the end of October, long-term interest rates in the United States remained high due to prolonged monetary tightening, and Japan was approaching the 1% limit. In the foreign exchange market, the yen was depreciating and the dollar was appreciating, adding to the rise in domestic prices. There was probably a desire to put a stop to these movements.

 

 

“Team transitory” Ueda Bank of Japan digs its own grave

 

Governor Kazuo Ueda emphasized at a press conference on the 31st that the Bank would　”persistently continue monetary easing.'' It also analyzed that the economy has not yet reached a virtuous cycle in which wage increases and prices rise simultaneously.

 

The problem, as the Mainichi editorial argues, is that the continuation of large-scale monetary easing has become too disconnected from the reality of the economy and prices.

 

The Bank of Japan has raised its inflation rate forecast for both fiscal 2023 and fiscal 2024 to 2.8%, which means that for three consecutive years, including fiscal 2022, the “2%'' inflation rate set by the Bank of Japan will continue to rise. This means that the stability target will be exceeded.

 

However, Governor Ueda seems to think that there is "still a long way to go" before it can be determined that the goal has been achieved. I have to say that this is a very arbitrary and subjective judgment. As mentioned above, the core-core CPI, which excludes fresh food and energy, which is unrelated to the subsidy policy for utilities such as electricity and gas, has seen a price increase of more than 4% compared to the previous year for the past seven months since the beginning of this fiscal year.

 

The governor also said that he will consider policy changes after seeing whether further wage increases can be achieved through spring labor strikes in 2024.

 

However, in reality, real wages, which take into account the effects of price increases, have remained negative for 17 consecutive months.

 

Although there are concerns about the vicious cycle between wages and prices in Europe and the United States, it is no exaggeration to say that no one is trumpeting the hopeful view that a virtuous cycle between the two will occur. In particular, in countries such as the United Kingdom, there are concerns that a tit-for-tat strategy between labor and management regarding wages and prices could lead to a vicious cycle of wages and prices.

 

The day after the decision-making meeting at the end of last month, Mainichi Editorial etc. stated that the Bank of Japan's mission is to stabilize prices and improve the national economy through monetary policy, and that it is important to conduct flexible reviews in response to changes in the real economy. It's understandable that this is a natural thing to do.

 

“Monetary policy trends have a major impact on people's lives, including interest rates on corporate loans and mortgages.  If monetary easing lasts longer than necessary, there is a risk of serious price increases and a bubble economy, so we must be cautious.

 

The Mainichi editorial concluded, “The Bank of Japan must calmly assess the future outlook for the economy and prices and move away from easing policy without missing the timing.'', that is encouraging to observe.

 

 

Ueda's unfairness at the Bank of Japan is highlighted by advance reporting of the Bank of Japan's decision and information leaks

 

On November 2nd, two Blumberg columnists criticized the Bank of Japan's fairness as follows.

 

“The Bank of Japan is often criticized for being a laggard, but when it comes to disclosing details of monetary policy meetings, it seems to be on the fence.

 

More than 12 hours before the decision of the meeting held on October 31st was officially announced, it was reported in the Nihon Keizai Shimbun that the Bank of Japan would discuss revising yield curve control (long-term and short-term interest rate control, YCC). The report was confirmed to be true.

 

In fact, the fourth power, journalism, appears to be the preferred means of disseminating the Bank of Japan's increasingly complex decisions. The actual details of monetary policy meetings were first reported in the media even though they were still under deliberation in three of the five meetings held since Governor Kazuo Ueda took office.

 

When Ueda made any announcements from the Bank of Japan, such as the review of forward guidance in April, the YCC revision in July, and the current YCC revision, such information was first shown in public. It was not, but the Nikkei newspaper.

 

This is not a trivial matter. This is a governance issue surrounding the money center of the world's third largest economy. A central bank's decisions can move huge amounts of money, so the impact of the Bank of Japan's conclusions is particularly large. Communication, once a peripheral part of monetary policy decisions, has become increasingly important over the past 20 years. Selective disclosure of sensitive information is ill-suited as one of the world's major central banks.”

 

“Another explanation could be that the leak came from somewhere within the Bank of Japan without the knowledge of upper management. This means that the Bank of Japan has either a communication problem or a security problem. Does the Bank of Japan want a situation in which when announcing the cancellation of interest rates, the information is leaked to the domestic media rather than an official announcement?

 

If it was leaked intentionally, it appears to have backfired. Before the meeting began, the Bank of Japan had taken a more hawkish stance than most had expected. After the Nikkei report, traders were likely expecting a more drastic turnaround, such as setting a de facto cap on long-term interest rates at 1.5%, and interpreted the BOJ's ambiguous language as a dovish move. After the meeting, the yen depreciated further, further increasing the risk that the Japanese authorities would be forced to intervene in the exchange rate.

 

Disclosing non-public information involves risks, and the impact can be large accordingly. The Federal Bureau of Investigation (FBI) has been involved in a multi-year investigation into Medley Global Advisors' alleged unauthorized disclosure of sensitive information from U.S. financial authorities. In 2017, then-Richmond Fed President David Rucker suggested he was merely confirming information that Medley's analysts already had, but he was eventually forced to resign.”

 

The Blumberg article continues,

 

``The Bank of Japan has a precedent when introducing negative interest rates. At the monetary policy meeting in January 2016, just a few minutes before the official announcement, then-Governor Haruhiko Kuroda announced the introduction of negative interest rates, which had been denied until the last minute. Nikkei reported that the incident was approaching. The shock of this incident was so great that the Bank of Japan launched an investigation. The investigation did not reveal much, but the decision meeting was held to provide explanations to the relevant ministers. Given that it was temporarily suspended, there are several other places besides the Bank of Japan where the information reported by Nikkei could have come from.

 

One of the important decisions that awaits the Bank of Japan in the future is the lifting of the negative interest rate that it decided to introduce at its January 2016 meeting. The problem is that there is no official announcement time for monetary policy decisions, and the Bank of Japan is the only central bank in developed countries to do so. While information is being selectively disclosed, the world should not be made to wait by keeping Nikkei's website updated. The Bank of Japan must ask itself questions about the continued leakage of information before the damage becomes too great.”

 

Unfortunately, apart from the Japanese people who tend to be obedient to authority, common sense in developed countries around the world would not allow for advance reporting of the Bank of Japan's decision and the seriousness of the information leak. I would like to urge the Bank of Japan to do some serious self-reflection. And, as far as I know, Japanese media has never written an article like Blumberg's.

 

Isn't this a repeat of the BBC's report on the serious issue of Johnny's Entertainment's sexual assault of minors in Japan, which shook Japan and the world? Will Japan continue to decline and become an underdeveloped country?

 

 

Why does Ueda BOJ continue to buy ETF and ignore his accountability?

 

As a side note, the Bank of Japan purchased 70.1 billion yen in ordinary ETFs (exchange traded funds) on the Tokyo stock market on October 4th. This was the Bank of Japan's third ETF purchase this year, the first since March 14, 2023, and the first time in about seven months, but it was the first ETF purchase since April, when Governor Kazuo Ueda took office. 4 days ago, TOPIX was 2,229.76 points, down 2.01% from the previous business day.

 

In any case, Governor Ueda went against his own beliefs by purchasing Japanese stocks (ETFs) at the Bank of Japan, which he had clearly argued was a major problem before and immediately after taking office, but he did not fulfill his own accountability.

 

Also, there were no reporters at Governor Ueda's press conference at the end of October, which attempted to address this issue.

 

Unfortunately, in the first place, the Bank of Japan and other institutions such as Nikkei

may not have focused on, unlike other G7 developed countries, the principal value that is free and democratic with the rules of fairness, transparency, and consistency.  Such arbitrary monetary policy will make Japan's economy and its financial markets even more inefficient and malicious.

 

In any case, even now in 2023, why are our country's leaders, including the Bank of Japan, continuing to repeat the serious failures so similar to the recent defeat over and over again?

 

 

New economic measures of Kishidanomics that only increase anxiety about the future

 

Nikkei Editorial reported in its morning edition on November 3rd about the cabinet decision on the government's comprehensive economic measures as follows. "The total amount, including fixed income tax and resident tax reductions, benefits for households exempt from resident tax, and the extension of measures to suppress gasoline prices and electricity and gas rates until the end of April 2024, will be in the 17 trillion-yen range.”

 

Continuing, the prime minister stated at a press conference, “The current top priority is to break away from deflation and put the economy on a growth path,'' emphasizing that the government will mobilize all its policies to raise the disposable income of the people. However, there are many questions surrounding the measures, including their timing and effectiveness.”

 

However, what are the economic measures for in the first place? Is it for the national economy or for the next general election?

 

On the one hand, large-scale monetary easing, centering on negative policy interest rates, will continue indefinitely despite high inflation.  On the other hand, large-scale fiscal stimulus equivalent to approximately 3% of GDP, is planned to be implemented in the latter half of this fiscal year and beyond. 

 

There clearly exists a great contradiction between aggressive monetary and fiscal policy, which is a never-ending game of cat and mouse, which could amplify inflation concerns and further worsen fiscal deficits and government debt.

 

Unfortunately, there is no guarantee that the twin aggregate demand stimulus measures of monetary and fiscal policy will not amplify and erupt within this fiscal year, or even within this calendar year, due to inflation and/or high interest rates.  However, it is unavoidable that the benefits be limited to low-income groups who are in dire straits due to high inflation and soaring food prices.

 

The economic reality is that there is an inflation gap in which aggregate demand slightly exceeds aggregate supply. Furthermore, in the labor market, the unemployment rate has remained below the long-term average level of 3.2% over the past 50 years since the 1970s, and has remained at almost full employment. It is no exaggeration to say that there is no longer anyone who disagrees with the tight supply and demand situation in the labor market.

 

In any case, due to the lack of wage increases, many people, like the Bank of Japan Ueda and Prime Minister Kishida, have failed to achieve the 2% price stability target, which they had promised the people for over the past 10 years. should not be used as an excuse.

 

Furthermore, the rosy story of a virtuous cycle between wages and prices is a real surprise. Looking across the East and West, and looking back at Japan's past history, policy makers are wary of continuing down the wrong path toward a vicious cycle of wages and prices and an uncontrollable inflation spiral.

 

 

The outbreak of the largest post-war economic crisis is inevitable.

 

To begin with, there are three lags in economic policy: recognition lag, implementation lag, and effect lag. Although there is no lag in the effect of fiscal policy, there is a lag in awareness and implementation, and we cannot deny the possibility that if it is implemented in June next year, it will already be too late, or it could become a powerful drug that amplifies inflation.

 

On the other hand, although monetary policy is said to have an effect lag of about six months to a year, it is said that there is no recognition lag or implementation lag (although Governors Kuroda and Ueda have no dementia regarding inflation).

 

Clearly, it is now the turn of the Bank of Japan, which should be the guardian of prices and currency. If the Nikkei editorial attempts to address economic measures include price measures, it would be strange not to prioritize the role of the Bank of Japan first.

 

Amid rising inflation and interest rates, the longer the Bank of Japan continues to take aggressive measures, by delaying the normalization of monetary policy, including the lifting of negative policy interest rates, the more likely it is that the ultimate crisis of the Japanese economy will emerge with the much bigger costs.

 

The Bank of Japan itself has already admitted in its October outlook report that inflation has exceeded 2% for the third consecutive years.

 

It is widely known, at least in economics textbooks in the United States, both at the undergraduate and graduate school levels, that the real policy interest rate that takes inflation into account turns positive is a necessary condition for disinflation, which is a decline in inflation. There's no way that Bank of Japan Governor Ueda, who received his Ph.D. from MIT, wouldn't know this basic economics 101.

 

As a democratic nation, the United States is the world's longest-running democracy, having continued for 247 years since the Declaration of Independence in 1776, but the US has not yet surpassed the Tokugawa era. Of course, the Tokugawa shogunate was by no means a democracy, but the Tokugawa shogunate system maintained (domestic) peace for 265 years from 1603 to 1868.

 

The era of Japanese imperialism, which began at the end of the Edo period and after the Meiji Restoration, brought great misfortune to the world for 77 years from 1868 to 1945, and ended in a major defeat for itself. Postwar Japan is once again at an impasse in 2023, 78 years since 1945. Are these simply historical tricks?

 

In any case, will a kamikaze blow in Japan that will cause inflation to disappear without the usual effort of bringing the real policy rate back into positive territory?

 

Also, what are the chances of winning by betting on the myth of a rosy scenario of a virtuous cycle of wages and prices rather than a vicious cycle of wages and prices?

 

Unfortunately, given the situation where the twin debts of the government and the Bank of Japan will continue to grow, like great stones standing in Easter Iland, due to the twin large-scale moves in fiscal and monetary policy not only in 2023 but also in 2024, Japan's greatest economic crisis in the post-war period may be approaching rather soon.

 

Unfortunately, without establishing scenario of Japan’s rebirth, one would have no choice but to well prepare for the worst-case scenario.

 

Former World Bank Economist

Tomo Nakamaru