Taps Coogan – September 5th, 2023

David Roche, Independent Strategy President and long-time market and geopolitical observer, recently spoke with CNBC about the excessively slow process the Bank of Japan (BoJ) is undergoing to normalize policy, calling it a ‘tea ceremony’ and “dead wrong.”

David Roche: 

“They (the BoJ) conduct policy like a tea ceremony. The last thing they want to hear is a cup falling on the floor, which is what would happen if they actually abandoned the policy and did what’s right. The reality is that the Japanese economy, given the growth in consumption, given the recovery in the economy, given the inflation, has no need for this special, extraordinary monetary policy which separates Japan from the world. I really think the tea ceremony approach to this is dead wrong because all you are doing is encouraging markets to take you on and force you to carry out the correct policy against your will.”

After a couple decades of averaging essentially zero, headline CPI in Japan peaked at 4.2% in January before falling to 3.1% in July, slightly below current headline CPI in the US despite the wildly more accommodative monetary policy stance. The fact that CPI in Japan never exceeded 4.2% (versus a peak of nearly 9% in the US) is evidence of just how much weaker their inflationary impulse is. That is almost certainly due to the persistent deflationary effect of Japan’s aging/shrinking demographics. 

More than risking run-away inflation, the slow pace of the BoJ risks missing the window of opportunity to escape its unhelpful ultra-accommodative policy trap before deflationary demographics overwhelm Japan yet again. 

For what it’s worth, EU demographics are on the same trajectory as Japan, albeit about ten years behind, and the US is in turn about ten years behind the EU, something for those in the persistent inflation camp to remember.