Japan’s economic landscape is undergoing a subtle shift as core consumer price growth picked up slightly in October, following a brief easing the previous month.
The countrywide core Consumer Price Index (CPI), which excludes volatile fresh food costs, rose 2.9% year on year in October, government reveals, compared with the 3% expected by economists in a Reuters poll.
Core inflation had slowed to 2.8% in September from 3.1% in August, the first time it was below 3% since August 2022.
This fresh data published on Friday have sparked debate among domestic and international investors about the potential for the Bank of Japan (BOJ) to reconsider its monetary stimulus measures.
A potential rollback of such policies could send ripples through global markets, impacting various asset classes and reshaping investor sentiment.
The most immediate impact of a BOJ monetary stimulus pullback would likely be felt in currency markets.
Historically, changes in the BOJ’s policy stance have influenced the value of the Japanese yen.
A reduction in monetary stimulus might result in a stronger yen, affecting Japan’s export competitiveness. Also, other major currencies, such as the US dollar, would likely experience fluctuations as global investors reassess their currency allocations in response to a strengthening yen.
Equity markets, both in Japan and globally, would react too to the prospect of a BOJ stimulus policy shift.
Sectors sensitive to interest rates, such as financials and utilities, could experience volatility as investors reassess the impact of changing monetary conditions on corporate earnings. Conversely, export-oriented sectors in Japan may face headwinds due to a potentially stronger yen affecting international competitiveness.
Changes in monetary policy in Japan would also influence commodities and real assets. As investors seek inflation hedges, commodities like precious metals could be expected to experience heightened demand.
In addition, real assets such as real estate and infrastructure could see increased attention as investors pivot toward tangible assets in response to evolving economic conditions.
In broader terms, the prospect of the BOJ rolling back monetary stimulus introduces an element of uncertainty into global markets, which could potentially impact risk sentiment.
Investors may reassess their risk exposure, leading to shifts in allocations between risk-on and risk-off assets. Market volatility could increase as participants adjust their investment mix due to changing expectations for Japan’s economic trajectory.
One thing is for sure: The consequences of a BOJ stimulus shift extend well beyond Japan’s borders, making it a focal point for investors worldwide.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.