Dissecting Outlook Uncertainty In Asia
Whilst much attention is currently placed on uncertainty in the US and Europe it’s important to keep abreast of developments elsewhere. In Asia, uncertainty is increasing as political tensions grow and look set to continue to do so. Now, the potential for an extreme shift in US policy following Trump’s election is adding a new dimension to this uncertainty.
Chinese Political Uncertainty
In China, the room for political uncertainty is typically quite limited given the one-party rule, however, the twice a decade Communist Party Congress is approaching later next year and a significant change in leadership is on the cards. Around five of the seven members of the Political Standing Committee are due for retirement ad around half, or more of the 376 members of the Central Committee are also expected to be relied.
The world’s second largest economy continues to struggle with the dilemma of reforming its economy in the name of sustainability and longer term growth versus simply sustaining growth in the short term.
Japanese Monetary Policy Uncertainty
In Japan, political uncertainty is virtually a non-issue with the Abe administration in a solid position. However, the issue there lies with monetary policy.After abandoning short-term interest rate changes as their monetary policy target in 2013, the BOJ once again shifted their focus in September and are now targeting yield curve control aiming to maintain the 10Y JGB at 0%.The bank also declared that they would continue to purchase JGBs at around the existing pace of 80tn a year. However, given that the JGB is not a monopolist in the market, a price target and a purchase target are incompatible as a pair of goals.
Furthermore, should global long-term rates continue to rise then upward pressure on JGB yields is likely to increase also. In this situation, the BOJ would likely find itself needing to either significantly increase the rate of JGB purchases or raise the yield target. However, this would effectively market the start of a tightening of monetary policy though not brought about through an improvement in economic conditions. As such it is unclear how policymakers in Japan would deal with such a situation.
