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A Noticeable Change In The Perception Of Japanese Monetary Policy

ByDanske Markets
Published 06/13/2013, 08:00 AM
Updated 05/14/2017, 06:45 AM
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Over the past three or four weeks, we have seen a very sharp sell-off in Emerging Markets - equities, fixed income and FX. Even though there are country-specific events such as the recent political unrest in Turkey, there is no doubt that the primary trigger for the EM sell-off has been concerns about the outlook for monetary policy, in particular in the U.S. and Japan and to a lesser extent the eurozone.

If we look at market expectations for future inflation, it is clear that inflation expectations have dropped markedly in recent weeks, which is a very clear indication that market participants have become fearful that the major monetary stimuli will be scaled down earlier than previously expected.

The change in the perception of Japanese monetary policy has been especially notable. Initially Japanese bond nominal yields rose on the expectations of higher inflation. Higher bond yields are a natural consequence of higher inflation expectations. Nonetheless, it seems to have surprised policymakers, and this has caused both government and BoJ officials to make comments that could call into question the BoJ’s commitment to continuing monetary easing. Whether or not that perception is correct is another thing, but the result has been a fairly steep drop in inflation expectations. Put another way, the credibility of BoJ’s new 2% target has clearly been called into question by the markets.


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