On Thursday, July 20, both the European Central Bank (ECB) and the Bank of Japan (BOJ) will meet. Depending upon the language out of the ECB, it seems that the BOJ will soon be alone among major central banks in not tightening monetary policy. Looking at other major central banks, the Federal Reserve has raised rates three times already in this cycle, the Bank of Canada raised rates last week, and consensus expectations are for both the Bank of England and the ECB to raise rates by the end of 2018:
When it comes to policy changes from Japan…expect none. Most market participants expect that the BOJ will neither raise rates nor curtail its quantitative easing program meaningfully until the end of 2018 at the earliest. Japan has had some decent economic data recently, such as an increase in wages and a boost in the Tankan survey, which does a good job of indicating future gross domestic product growth. But with inflation nowhere near its 2% target, the BOJ will likely keep policy loose for the foreseeable future.
In contrast, the ECB will meet this week and is expected to continue the work began by ECB President Mario Draghi at his June 27 speech in Sintra, Portugal, during which he mentioned the inevitability of normalization of European monetary policy. So the real question is not if the ECB tightens, but when and how. While we expect no meaningful policy change from the ECB until 2018 since it has pledged to buy €60 billion in bonds each month until December 2017, we do expect more clarity on how it will taper its bond purchases next year.
What does it mean to be back in a world where only Japan has a super easy monetary policy? A weaker yen for one thing. The BOJ does not target a value for the yen, but instead targets inflation. Given the persistent low inflation in Japan, it may be that no value for the yen is too low since a weaker currency helps spur foreign demand, which helps to drive up prices. The BOJ may ultimately get the weak yen it has wanted for so long; however, as so many stories tell us, be careful what you wish for.