After sending global markets in a brief tailspin in early August,
the Bank of Japan is once again the center of attention. Our
Global Chief Economist and Chief Asia Economist discuss the
central bank’s next steps to help ease volatility and inflation.
----- Transcript -----
Seth Carpenter: Welcome to Thoughts on the
Market. I'm Seth Carpenter, Morgan Stanley's Global Chief
Economist.
Chetan Ahya: And I'm Chetan Ahya, Chief
Asia Economist.
Seth Carpenter: And on today's episode,
Chetan and I are going to be discussing the Bank of Japan and the
role it has been playing in recent market turmoil.
It's Friday, September 13th at 12.30pm in New York.
Chetan Ahya: And it's 5.30pm in London.
Seth Carpenter: Financial markets have been
going back and forth for the past month or so, and a lot of
what's been driving the market movements have been evolving
expectations of what's going on at central banks. And right at
the center of it has been the Bank of Japan, especially going
back to their meeting at the very end of July.
So, Chetan, maybe you can just level set us about where things
stand with the Bank of Japan right now? And how they've been
communicating with markets?
Chetan Ahya: Well, I think what happened,
Seth, is that Bank of Japan (BoJ) saw that there was a
significant progress in inflation and wage growth dynamic. And
with that they went out and told the markets that they wanted to
start now increasing rate hikes. And at the same time, the end
was weakening.
And to ensure that they kind of convey to the markets that they
want to be now taking rates higher, the governor of the central
bank came out and indicated that they are far away from neutral.
Now while that was having the desired effect of bringing the yen
down, i.e. appreciated. But at the same time, it caused a
significant volatility in the equity markets and make it more
challenging for the BoJ.
Seth Carpenter: Okay, so I get that. But I
would say the market knew for a long time that the Bank of Japan
would be hiking. We've had that in our forecast for a while. So,
do you think that Governor Ueda really meant to be quite so
aggressive? That meeting and his comments subsequently really
were part of the contribution to all of this market turmoil that
we saw in August. So, do you think he meant to be so aggressive?
Chetan Ahya: Well, not really. I think
that's the reason why what we saw is that a few days later, when
the deputy governor Uchida was supposed to speak, he tried to
walk back that hawkishness of the governor. And what was very
interesting is that the deputy governor came out and indicated
that they do care for financial conditions. And if the financial
conditions move a lot, it will have an impact on growth and
inflation; and therefore, conduct of monetary policy.
In that sense, they conveyed the endogeneity of financial
conditions and their reaction function. So, I think since that
point of time, the markets have had a little bit of reprieve that
BoJ will not take up successive rate hikes, ignoring what happens
to the financial conditions.
Seth Carpenter: But this does feel a little
bit like some back and forth, and we've seen in the market that
the yen is getting a little bit whipsawed; so the Bank of Japan
wants to hike, and markets react strongly. And then the Bank of
Japan comes out and says, ‘No, no, no, we're not going to hike
that much,’ and markets relax a little bit. But maybe that
relaxation allows them to hike more.
It kind of reminds me, I have to say, of the 2014 to 2015 period
when the Federal Reserve was getting ready to raise interest
rates for the first time off of the zero lower bound after the
financial crisis. And, you know, markets reacted strongly -- when
then chair Yellen started talking about hiking and because of the
tightening of financial conditions, the Fed backed down.
But then because markets relaxed, the Fed started talking about
hiking again. Do you think that's an apt comparison for what's
going on now?
Chetan Ahya: Absolutely, Seth. I think it
is exactly something similar that is going on with Bank of Japan.
Seth Carpenter: So, I guess the question
then becomes, what happens next? We know with the Fed, they
eventually did hike rates at the end of 2015. What do you think
we're in line for with the Bank of Japan, and is it likely to be
a bumpy ride in the future like it has been over the past couple
months?
Chetan Ahya: Well, so I think as far as the
market’s volatility is concerned, we do think that the fact that
the BoJ has come out and indicated that their reaction function
is such that they do care about financial conditions. Hopefully
we should not see the same kind of volatility that we saw at the
start of the month of August.
But as far as the next steps are concerned, we do see BoJ taking
up one more rate hike in January 2025. And there is a risk that
they might take up that rate hike in December.
But the reason why we think that they will be able to take up one
more rate hike is the fact that there is continued progress on
wage growth and inflation; and wage growth is the most important
variable that BoJ is tracking.
We just got the last month's wage growth number. It has risen up
to 3 percent. And going forward, we think that as the BoJ gets
comfort that next year's wage negotiations are also heading in
the right direction, they will be able to take one more rate hike
in January 2025.
Well, Seth, I think, you know, when we are talking about this
volatility that we saw in the financial markets and particularly
yen, the other side of this story is what the Fed has to do, and
what is Fed indicating in terms of its policy path. And we saw
that, after the nonfarm payrolls data, Governor Waller was
indicating that the Fed could consider front-loading its rate
cuts. What are your thoughts on that?
Seth Carpenter: So, we do think the Fed's
getting ready to start cutting rates. Our baseline is that they
move at 25 increments per meeting, from now through the middle of
next year. I would take Governor Waller's comments though about
front-loading cuts -- which I took to mean, you know, the
possibility of 50 basis point rate moves -- very much in context,
and with a grain of salt.
When he gave that speech, I think what he was trying to do, and I
think the last paragraph of that speech really bears it out. He
was saying there's a lot of uncertainty here. He said, if the
data suggests that they need to front load rates, then he would
advocate for it. But he also said that, if the data implied that
they need to cut at consecutive meetings, he'd be in favor of
that as well. So, he was saying that the data are going to be the
thing that drives the policy decisions.
But thanks for asking that question. And thanks to the listeners.
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