Japan and the United States (US) are the destinations for the 2016 Travelling Economist research trip.

Welcome to the Travelling Economist series for 2016. 

This Introductory blog is the first in a series detailing the state of the US and Japanese economic landscape.

Japan and the United States (US) are the destinations for the 2016 Travelling Economist research trip. Global financial markets have been watching these two nations very closely this year, as the monetary policy settings of the Bank of Japan (BoJ) and the US Federal Reserve (the Fed) are having a significant impact, not just on their own economies, but markets all around the world.

On this trip I will be focusing on the outlook for the economy and inflation in Japan, and how the recent ‘comprehensive reassessment’ on monetary policy is affecting not only Japan, but financial markets around the world. I will also focus on fiscal policy in Japan and how negative interest rates and negative bond yields interplay with the government’s desire to stabilise debt. As always in recent years a key question remains – is Abenomics working?

So the first stop on this 10 day trip through late October will be Tokyo. There I will have the opportunity to meet with both the BoJ and the Ministry of Finance (MoF), as well as a number of private sector economists and financial market participants.

The first Blog from Japan (Blog 2) will cover the economy, inflation and fiscal policy – focusing on the nature of the economic and inflation outlook in Japan, especially in the context of the very poor demographics facing Japan and a lack of productivity growth.

Blog 3 will focus on the BoJ and monetary policy. I will explore the background and follow-on from the BoJ’s ‘comprehensive reassessment’ of its monetary policy regime and the decision to target 10 year Japanese government bond (JGB) yields at 0%, while maintaining a cash rate of -0.1%. While the BoJ should be able to achieve its objective of a 0% 10 year JGB yield through its asset purchase program, the question remains – how effective will this be in raising inflation to the 2% target?

In the US, I will be travelling to San Francisco, New York and Washington, visiting representatives from the Fed and the Department of Treasury. I will also hold a number of meetings with other economists and political analysts from the private sector. Given that I will be in the US less than one week prior to the next meeting of the Federal Open Markets Committee (FOMC) and two weeks ahead of the Presidential election – the timing could not be better.

My first blog from the US (Blog 4) will focus on the outlook for the economy, employment and inflation. While US economic growth has been a little disappointing this year, it has been more than sufficient to create ongoing solid employment growth and a downward trend in the unemployment rate – even as the participation rate drifts higher. However, wages growth generally remains low in the US, although there is some signs that this is beginning to change. The culmination of these economic developments is a rate of inflation that is below the Fed’s 2% target, but gradually looks like it is creeping higher.

In Blog 5 I will explore the implications of all this for the Fed and monetary policy. The Fed is expected (by both us and the market) to leave the Fed Funds target rate unchanged at the 2 November FOMC meeting, but then raise rates to a new 0.5%-0.75% range at the final meeting for the year on 14 December. This, of course, will mean the Fed would have raised interest rates only once in 2016 – having started the year indicating that four rate hikes were the base case. For 2017, 2018 and 2019 we expect the Fed to raise interest rates twice in each year for a peak of just around 2%. There is nothing to fear, in my view, for financial markets from this very gradual rate hike path. I will explore this idea with the Fed and other market economists, as well as discussing the longer-term outlook and suggested changes to the Fed’s inflation-targeting regime.

Of course, the other significant upcoming event in the US is the Presidential and Congressional election on Tuesday 8 November. Blog 6 will explore the outlook for the elections and the implications – of which there are many given the characters involved! From my meetings in Washington I will be able to provide an in-depth analysis of how the elections are evolving and what the political, policy and financial market implications may be.

The final instalment (Blog 7) will draw on all my meetings in both Japan and the US and provide conclusions, not just for politics, policy and the economies, but also for financial markets.

I trust that you will enjoy the blog series.

Stephen Halmarick

Chief Economist, CFSGAM