25 January 2020
Japan has rolled out various unconventional measures to bring back inflation, but to no avail. Photo: Reuters
Japan has rolled out various unconventional measures to bring back inflation, but to no avail. Photo: Reuters

What keeps Japan stock market investors up at night

Can Japan reach its inflation target? Will yen continue to depreciate? I’m not optimistic about that.

An uptrend in the value of the yen will put pressure on the country’s inflation rate.

Many economists see Japan as a best laboratory to experiment on the impact of monetary policy on deflation.

Japan is the first, among developed countries, to experience severe and rapid aging problem. It’s also the first country to get stuck in long-term deflation, the first to adopt zero interest rate policy and the first to fight deflation with currency depreciation.

However, Japan has yet to bring back inflation. All these non-conventional measures failed.

Shortly after the Japanese central bank adopted the negative interest rate policy, the dollar weakened to 112 yen from 121, showing that the authority has lost control over the trend of the yen exchange rate.

The target of all the traditional and unconventional measures is the same – to lead capital to the real economy through low interest rates and ample liquidity.

The rise of financial asset prices and inflation expectations should have resulted in a wealth effect and more consumption.

None of these happened in Japan. Japan’s bank loan rate has fallen to 2.2 percent in the beginning of the year from 2.7 percent in last August.

Meanwhile, the growth of total deposits slowed to 3.1 percent in February from 4.6 percent in May last year.

These are clear signs of deflation.

In the job market, the working class has been suffering from frozen salary levels. Recently, Toyota said it could not raise salary levels despite last year’s record profit.

If the rise of the Nikkei index to 20,000 in the middle of last year from only 10,000 at the end of 2012 was fueled by the yen’s depreciation, we will have no doubt as to what the impact of yen’s appreciation will be like.

The supporters of the Japanese central bank and the bullish investors of the Japanese stock market may have trouble sleeping in the coming days.

This article appeared in the Hong Kong Economic Journal on March 24.

Translation by Myssie You

[Chinese version 中文版]

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head of private banking and trust services at Hang Seng Bank