Hello, my name is Mary Park Durham, and I am a research associate at J.P. Morgan Asset Management here with a recap of the recent Bank of Japan meeting.
The Bank of Japan decided to keep rates unchanged at 0-0.1% and announced intentions to slow the pace of Japanese Government Bond purchases to gradually shrink its balance sheet over the next 1-2 years. The current pace of asset purchases is keeping the balance sheet stable, so any reduction in purchases should lead to quantitative tightening. It will provide details about the exact plan at the July meeting.
The Bank of Japan plays a big role in managing Japan’s debt and ensuring financial stability. Its balance sheet is worth approximately 761 trillion yen or about 5 trillion dollars, and it owns more than 50% of all Japanese Government Bonds. Therefore, the BoJ will likely take a cautious approach when reducing its balance sheet.
The BoJ’s economic assessment was little changed, and importantly, it sees core inflation tracking in the range of 2.0-2.5% in the near term due to a rise in services prices caused by higher wages. In April, headline inflation stayed above the target of 2.5% but has been falling for several months. Growth continues to be the bigger challenge. Quarter-over-quarter 1Q24 GDP was -1.8%, and consumption patterns are still below their pre-pandemic trend. Therefore, the BoJ faces a big dilemma: fail to raise rates and risk more currency weakness or raise rates and risk further depressing the economy. Additionally, postponing the balance sheet discussion to next month’s meeting makes it more unlikely that it will hike rates in July.
Following the meeting, the yen weakened almost 1%, reflecting that progress on JGB tapering is moving slower than markets hoped. Japanese equities are still up 16% YTD in local currency, but yen weakness continues to be a significant drag for U.S.-based investors. On the other hand, future profits of Japanese companies look promising due to higher inflation and corporate governance reforms. Also, Japanese companies derive a lot of their revenues from abroad, so they can still do well despite the weak macro picture. In summary, Japan continues to warrant a second look from investors, but active management is key to find the best opportunities.
Thank you for listening. For more insights on Japan’s economy and markets, please check out our website am.jpmorgan.com or our mobile app, “Insights” by J.P. Morgan Asset Management.
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This content is intended for information only based on assumptions and current market conditions and are subject to change. No warranty of accuracy is given. This content does not contain sufficient information to support investment decisions. It is not to be construed as research, legal, regulatory, tax, accounting or investment advice. Investments involve risks. Investors should seek professional advice or make an independent evaluation before investing. The value of investments and the income from them may fluctuate including loss of capital. Past performance and yield are not indicative of current or future results. Forecasts and estimates may or may not come to pass. JPMorgan Asset Management is the asset management business of JPMorgan Chase & Co and its affiliates worldwide.