The leaders of the world’s top central banks convened this week in Sintra, Portugal, not for an early summer holiday, but to discuss their views on the global economy in the year ahead.
Investors were keen to hear the individual progress reports on how their battles against inflation were unfolding. The general theme communicated was that whilst inflation is trending lower, it is too early to declare victory and, to the disappointment of most equity investors, further tightening may be required in the months ahead.
Federal Reserve Chairman Jerome Powell said, “Although policy is restrictive, it may not be restrictive enough, and it has not been restrictive for long enough”. The market reaction to the conference has been fairly muted, with central bank leaders making comments that were broadly in line with the previous guidance issued.
Things have changed dramatically in recent years for central bankers. The job seemed relatively straightforward for over a decade between 2009 and the pandemic in 2020. Inflation was low, meaning interest rates were set at rock bottom levels, and there was little reason to alter them. In times of trouble, they knew where to turn, and the printing presses were fired up in the form of quantitative easing to try to stimulate economies.
What a difference a few years have made, with the job now looking much less enviable. As inflation took hold following the pandemic, central bankers have taken on the unpopular role of deliberately trying to cool economies by undertaking one of the steepest interest rate hiking cycles in history.
As we come to the end of June, many of us are looking forward to the summer holidays. Although, it is not normally the first destination that springs to mind for holiday plans, there are many reasons why a trip to Japan could be of interest. In addition to being a beautiful and fascinating country, it is now the only major developed economy still maintaining a near-zero interest rate policy. As such, the yen has depreciated significantly over the past couple of years. Having traded around 130 yen to the pound in early 2020, the yen is now currently over 180. Considering the increase in the value of the pound and the fact that prices have barely moved in Japan for 20 years, a visit to Japan could be of value in many ways.
In a meeting with a Japanese fund manager recently, he explained that it is socially unacceptable to increase prices in many sectors. He described that when savoury snack maker Yaokin Corp increased prices of their much-loved Umaibo corn puff for the first time since 1979, they had to issue press releases justifying the need for the increase.
John Naylor, Chartered FCSI – Head of Investment Committee