This time, BOJ could wait and watch before coming to yen’s rescue

September 15, 2015

U.S. one-hundred dollar bill and Japanese 10,000 yen notes are spread in TokyoThe Japanese yen has strengthened unexpectedly by about 4 percent over the last month and it could rise further if the U.S. Federal Reserve delays a rate hike and the dollar weakens.

Almost every instance of a rapid rise in the yen in recent years has been met with some kind of policy response from the Bank of Japan or the government given how important selling finished goods to the rest of the world at a competitive price is to the world’s third largest economy. 

But this time around, the Bank of Japan is unlikely to add further stimulus to combat it.

BOJ Governor Kuroda, speaking at a news conference after Tuesday’s meeting at which the central bank held policy steady, had this to say about the yen.

I don’t think you can say that if the dollar stays around, say, 120 yen, that prices won’t rise anymore.

We can’t say that a weak yen will always push up inflation because if import costs rise, that hurts consumption for other goods. If you also look at a certain timeframe, the yen doesn’t usually keep weakening or strengthening forever.

The problem is inflation is still near the level it was at when the BOJ kick-started a massive easing campaign around two and a half years ago, and expectations of it rising sharply are wilting.


Economic growth has disappointed as well. GDP forecasts were lowered considerably in the September Reuters poll; third quarter growth expectations were revised down to 1.3 percent from 2.2 percent and the next few quarters don’t look too upbeat either.

Still, the latest survey showed the BOJ will not increase stimulus to an economy grappling with prospects of deflation and recession, at least until next year. That is similar to the consensus from a survey last month.

Without more easing from the BOJ or the government, and considering the yen’s safe haven status among investors, the risk of a yen rally during times of turmoil in global financial markets, like last month, deserves some attention.

Currency strategists in Reuters polls did not expect the yen to strengthen in August. The latest forecasts for the yen to weaken over the next year are largely based on the assumption of further policy easing.

Graphic for Japan blog

Prime Minister Shinzo Abe’s blueprint to lift inflation and reignite growth, ‘Abenomics’, hasn’t been particularly effective — apart from propping up the Nikkei some 70 percent since 2013 — even during a time when the U.S. Federal Reserve was in the midst of its own quantitative easing program with near-zero interest rates.

The Fed is now on the verge of deciding whether the world’s largest economy can withstand a rate hike, the first in nearly a decade.

If it does hike on Sept. 17, the Fed would become the first central bank to successfully emerge out of the shadow of quantitative easing coupled with near zero interest rates, a feat not managed by any of its peers in recent times.

Economists have started to turn against a U.S. hike this week and financial markets were not expecting it anyway. If the Fed holds fire, expectations of a hike could shift on to the October 27-28 meeting. The BOJ meets just a day later on October 30.

A Fed rate hike could weaken the yen, and in a sense do some of the BOJ’s job for it, according to ING’s chief international economist Rob Carnell. But he said it was futile to take on more easing just to weaken the yen:

The currency is already extremely undervalued. Do we really need to push things further with another attempt to try and squeeze the yen softer with additional QQE? It doesn’t seem really warranted at this point and you’re better hanging on waiting to see how things develop.

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