Editor Pick: IMF on Japan’s Capital Flows and Monetary Policy
This selected issues accompanying the IMF Article IV consultation with Japan point to the structural changes in Japan’s capital outflows, and how they contribute to the yen dollar exchange rate and the carry trade.
Private holdings have been largely concentrated in debt securities,consistent with a widening of interest rate differentials, low market volatilities, and a generally conservative approach to investing. Households are also purchasing an increasing amount of equities in search ofhigher yield. Meanwhile, Japanese corporations are seeing a sharp increase in income from foreign assets, reflecting past projects that are now turning profitable…Households could increase external holdings significantly over the next ten years—potentially providing a boost to some emerging market economies (most likely, to those in Asia). These outflows could also act as a headwind to movements in the yen exchange rate. At the same time, many may not be fully aware of the risks of investing abroad, and regulators may need to strengthen oversight…further deregulation to foreign ownership and reforms to deepen domestic financial markets could catalyze capital inflows to Japan and help offset downward pressure on the yen.
In the Staff Report itself and the accompanying conference call, they further address the subject of the weak yen (and the inflation outlook):
“low interest rates in Japan which are, we believe, appropriate from the viewpoint of sustaining the Japanese recovery which is good not only for Japan but for the rest of the world. The implication of that is the yen has tended to be weaker than what most economists would judge to be appropriate from the viewpoint of sort of long term fundamentals.
In that sense, a weaker yen has put competitive pressures on certain countries and at the same time the portfolio-related outflows from Japan have led to in-flows and stronger currencies in certain emerging markets that feature in carry trades and has complicated perhaps matters in recipient countries.
on how the BoJ could better communicate with market actors:
First of all, in describing its price understanding which, as you know, at present the understanding of price stability ranges from 0 to 2 percent. I think it would be helpful if, to the extent possible, there could be as much emphasis or perhaps even I should say more emphasis on the fact that most policy board members believe that a 1 percent inflation rate is consistent with price stability. So that’s one specific suggestion that we have, that they emphasis this median rather than the 0 to 2 percent range.
Secondly, I think in its various publications, I think it would be helpful if the Bank of Japan were to include a forward-looking assessment of the main risks in the outlook, and this would, I think, help market participants try and get a better feel for the thinking of the central bank.
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