If you thought there wasn’t enough easy play money fueling the global equities market, keep your eye on the fiscal (and political) policy drama playing out in Japan. Talk about being between the proverbial rock and a hard place. The Bank of Japan is caught between the political fallout and pain of further pursuing its quantitative and qualitative easing (QQE) policies and the deflationary downward spiral of global oil’s recent slump. With no end in sight to oil’s price slump, at least for the short term, it is beginning to become very clear to the Bank of Japan that its 2% inflation target is not going to happen any time soon.
Oil and key commodities are slipping and import-heavy Japan’s cost base continues to erode. Normally, this would be a good thing but since Japan’s economic woes stem from the fact that it is caught in a deflationary death spiral for the better part of two decades now, this is nothing but bad news. Why should consumers buy products now when they can bet the farm that prices may drop further in the future? Indeed, core inflation in Japan has been adjusted downward from 1.7 to 1.5 percent.
While Shinzo Abe’s government has turned a lot of heads in its steely political will to do what it takes to spur inflation in Japan, he can only go so far-in terms of political leeway. Granted that his government was reelected with strong numbers recently, this vote of confidence might lead to despair and disappointment if more painful efforts at depreciating the yen kicks in thanks to QQE. According to analysts, if the BOJ’s projected inflation target nears 1%, the BOJ might be forced to pull the trigger on another round of easing. If you are playing the yen or Japanese stocks, keep your eyes glued to the BOJ.