Asia Economy

Abe defends monetary policy ahead of BOJ, pushes for TPP trade pact

Japanese PM Abe speaks to NYC investors

On the eve of a key Bank of Japan meeting, Japanese Prime Minister Shinzo Abe defended his country's economic initiatives and aggressive monetary policy before a group of investors and executives in New York.

"There is no doubt that Abenomics has improved Japan's investment climate," Abe said in an address at a U.S./Japan investment conference at the Pierre Hotel.

However, there has been growing speculation that the three arrows of Abenomics — monetary, fiscal and structural — have yet to show signs of revitalizing the world's third-largest economy.

Japan continues to suffer from economic stagnation, chronic deflation and high debt.

But instead of addressing these concerns, Abe was defiantly positive, emphasizing the government's prioritization of foreign direct investment.

"Japan's outstanding balance of inward foreign direct investment reached a record 24 trillion yen (about $236 billion) last year. We are putting into action further reforms with the goal of reaching 35 trillion yen by 2020," he said, adding that he wanted to underscore to U.S. investors that Japan had an "attractive and profitable" landscape.

Japanese Prime Minister Shinzo Abe speaks during the "Investment Opportunities in Japan: Toward the New Asia-Pacific Era" meeting, on the sidelines of the United Nations General Assembly in New York City, Sept. 19, 2016.
Rashid Umar Abbasi | Reuters

Abe also pushed the Trans-Pacific Partnership trade deal promoted by the Obama administration but opposed by both Hillary Clinton and Donald Trump. The TPP trade deal is an important part of Japan's economic vision.

"Japan and the U.S. must each obtain domestic approval of the TPP as soon as possible for its early entry into force. ... I will pursue approval of the TPP. ... Japan will spare no effort, and we count on the U.S. to do the same," he said.

The timing of Abe's comments on Japan's economy and monetary policy are significant in that they come one day ahead of the start of the Bank of Japan's two-day policy meeting, which is likely to be more market moving than the Federal Reserve meeting held on the same days. The Japanese Prime Minister declined to comment to CNBC on the upcoming meeting.

Analysts are split over what the BOJ will unveil Wednesday but cutting rates deeper into negative territory is one option being floated.

Negative interest rates have in some ways become the centerpiece to Japan's revamped stimulus plan. However they have drawn a lot of criticism as subzero rates have hurt banking profitability.

In fact, Japan experts at Capital Economics are forecasting a more than 15 percent drop in Japanese banking profits in 2016, as negative rates have so far failed to incentivize financial institutions to lend more.

BOJ Governor Haruhiko Kuroda is well-aware of the pressure Japan's financial sector is under. Therefore, some economists believe the Bank of Japan will readjust its bond-buying program to cushion the blow by buying more shorter and less longer-dated government bonds. A move like this could steepen the yield curve and also spur heightened volatility in the global bond market.

In late summer, yields on Japan's 10-year and 30-year bonds started to rise as investors speculated what the Bank of Japan's next move would be after the European Central Bank kept rates on hold. The uptick in yields was notable and European and U.S. bonds followed Japan's lead.

Either way, further moves taken by the Bank of Japan are expected to be scrutinized.

"Many argue that monetary policy is reaching its political and/or ideological limit, even if theoretically interest rates can go deeper into negative territory than the ECB or BOJ have," wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman.