It is time to look at Nihon or the land of the rising sun again. What we are seeing there is that again it looks to be pushing the boundaries of monetary and fiscal policy. Let us start with monetary policy and here is Reuters from just under a week ago.
A Bank of Japan move to raise interest rates at a time when the government is calling on companies to invest more would likely send a mixed message on policy, according to the leader of Japan’s ruling coalition partner.
So Abenomics 2.0 looks rather like the original version at this point and the rationale in this instance is below.
“We are at a point where we are calling for more investment in the private sector, and such a move could seem like a contradictory measure,” Japan Innovation Party co-leader Fumitake Fujita said in an interview with Bloomberg News on Wednesday, referring to an increase in borrowing costs. “Our basic stance is that restraint needs to be exercised regarding the timing.”
Note the mention of “borrowing costs” which as we have looked at before have already risen in terms of bond yields. We may have another politician here who is yet to adjust to that new world. But it feels as though the Bank of Japan is being given its instructions which is how things took place under the original policy of Abenomics.
The Bank of Japan
The official view was given by Board Member Nakagawa on Monday.
With regard to the future conduct of monetary policy, given the current level of real interest rates shown in Chart 9, if its outlook for economic activity and prices is realized, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation in response to improvement in economic and price developments.
His chart 9 is in fact rather revealing and we can start with the one-year real interest-rate of -1.5%. That rather eloquently confirms my theme that the Bank of Japan is in fact not a fan of higher interest-rates as otherwise it would have raised them by more. For example the old monetary rule of thumb is that you need to raise interest-rates 2% higher than inflation to bear down on it, whereas in 2022/23 Japan was 2% below.
There is a further issue here from the inflation forecast provided.
The high CPI growth for fiscal 2025 is due to the factors that I explained earlier. The year-on-year rate of increase in the CPI is likely to decelerate temporarily as inflationary pressures wane over time.
This theme here is reinforced by the detail.
The year-on-year rate of change in the CPI for all items excluding fresh food is projected to be 2.7 percent for fiscal 2025, 1.8 percent for fiscal 2026, and 2.0 percent for fiscal 2027, also 5in terms of the median of the forecasts.
As you can see he is forecasting inflation to be at or below the level defined by the Bank of Japan as defeating deflation. So if anything you might argue for a cut in interest-rates if you believe that. There is a swerve there in excluding fresh food in a rice price crisis.
Rice Rice Baby
Yes there is trouble again.
However, the average price rebounded and has now been in the ¥4,000 range for nine consecutive weeks and threatened the record high of ¥4,285 set in mid-May. ( Yomiuri Shinburn)
The central planning of rice production has gone very wrong and the new policy is to hand the job to Mr and Ms Market.
According to the Finance Ministry’s trade statistics, 86,523 tons of rice was privately imported in the first half of fiscal 2025, more than 200 times the volume over the same period last year.
It was hard not to have a wry smile at this.
When private parties import rice, a tariff of ¥341 per kilogram is imposed. Despite this, Japanese companies have increased their rice imports because the prices are lower than domestically produced rice, even with the tariff.
Yep tariffs!
Stagnant Real Wages
There was something else that confirmed one of my main themes and one I have held for more than a decade.
In real terms based on the consumer price index (CPI), the year-on-year rate of change in employee income has been at around 0 percent, reflecting CPI inflation.
Actually real wages have fallen which he then does admit albeit by inference.
The number of employees has also increased, mainly in the information and communications industry and in the medical, healthcare, and welfare services industry, both of which have faced severe labor shortages.
The swerve is that he used employee income which if divided by more workers means real wages on an individual level have fallen. Although he then returns to the usual rhetoric of looking at nominal wages.
Wage growth has been driven both by the high wage growth rate agreed in the 2025 annual spring labor-management wage negotiations and by an increase in bonus payments on the back of favorable corporate profits.
But if we come back to today’s theme then if real wages are stagnant then they do not provide a reason to raise interest-rates.
Japanese Government Bonds
I have left until now the mention of them in chart 9 of the speech because we clatter into one the the trends of the last year.
Japanese government bond yields are AGAIN on the rise: Japan‘s 10-year government bond yield reached 1.69%, the highest since the 2008 FINANCIAL CRISIS. Japan‘s 40-year government bond yield hit 3.52%, near the highest since its debut in 2007. Watch this space carefully. ( Global Markets Investor)
Actually the ten-year went above 1.7% this morning. This allows our central banker to claim the real interest-rate has fallen from around -1% to around -0.25%. Inflation expectations can be used to provide almost any answer you want! But my point here is that this has been driven by the market as the Bank of Japan has stepped back.
At the June 2025 MPM, the Bank decided on a new plan for the reduction 7of its monthly outright purchases of JGBs, so that the purchase amount will be about 2 trillion yen in the January-March quarter of 2027; the amount will be cut down, in principle, by about 400 billion yen each calendar quarter until the January-March quarter of 2026, and by about 200 billion yen each calendar quarter from the April-June quarter of 2026.
For clarity whilst it remains a gross buyer the balance sheet is now shrinking because the holdings are so large the maturities exceed the buying. But unless you argue that not doing something is a type of control we now see this.
based on the principle that long-term interest rates are to be formed in financial markets.
I do not think they had any idea that Japanese bond yields would rise like this. They should have listened to me as I pointed out back in the day that I thought the ten-year would initially settle between 1.5% and 2%.
Comment
What I have described today brings with it quite a few problems. Let me start with the Japanese Yen.
Japan’s finance minister issued a warning regarding currency movements as the yen weakened toward the key psychological threshold of 155 to the US dollar ( Bloomberg)
The Yen has weakened today such that they feel the need to start open mouth operations in support of it. We are now rather near to levels at which they may well actually intervene. So those trading currencies do not believe the interest-rate promises.
Much of that comes from the Abenomics style plan for fiscal policy.
Market players are also wanting more clarity on how the government will fund plans to increase defense spending and if it will end up lowering the sales tax, another measure that would put more strain on the nation’s finances. ( Bloomberg)
So more spending to add to the national debt which is not being supported by the Bank of Japan like it used to be. Then we have the issue of higher bond yields making both it more expensive and depth-charging the Bank of Japan’s balance sheet. We know the Governor of the Bank of Japan is worried about the latter because he denied it back on October 2nd 2023.
For example, the FRB, like the Bank of Japan, uses the amortized cost method and discloses
unrealized gains/losses as reference information. As of March 31, 2023, the FRB held substantial unrealized losses on its bond holdings, amounting to 0.9 trillion dollars.
However, this does not directly affect its actual profits/losses, as in the case of the Bank of
Japan.
So if you look at likely policy then the Japanese Yen has trouble ahead….
