It hasn’t been easy for investors to find good news in the last few weeks, but the falling oil price should offer some.
And from the perspective of the Japanese, it should be great news.
For months now, analysts have been fretting that the gains for exporting companies from the QE-driven fall in the yen would be offset by the rise in the price of energy (Japan imports the vast majority of its oil).
With the oil price now down 27% from its peak in the summer, and at its lowest for four years, that shouldn’t be so much of a problem any more. Add cheap energy to a cheap yen and Japan should be getting more stimulus than it knows what to do with.
What’s more, the combo could soon prompt demands for more stimulus.
The Bank of Japan’s Haruhiko Kuroda is committed to creating inflation at 2%. (This doesn’t make complete sense – see the last two posts in my Japan diary – but there you have it.) However, the falling oil price makes this even harder to achieve: energy accounts for over 8% of Japan’s core CPI calculation, and inflation is still only just above 1%.
Kuroda has noted that falling oil prices are “a plus” for the economy* but he must also have noticed that they increase the odds of inflation falling below 1% – something he recently said there was “no chance of”.
The result is that he will face accusations of failure and demands to print more to push the yen down further and offset falling oil prices. It might sound nuts, but that’s modern central banking for you.
On the plus side, we know that QE usually means rising markets – so if you are looking for somewhere for your money at the moment (and you realise that there is no such thing as a safe have in modern markets) Japan looks like one place to look.
*More on this in the magazine this week but this isn’t just the case in Japan. It is, as Brewin Dolphin note this week, something of an irony that “the current weakness in commodity markets is likely to be substantially more stimulative than the outgoing raft of official measures in the Anglo Saxon economies.” Note that petrol prices have fallen 12% plus in the US since the end of June and that even prices in the UK are down 7% or so in the last year.