JPY: Reading in too much? - Rabobank

If BoJ Governor Kuroda is taken at his word, the BoJ will be continuing with its huge QQE programme during the course of this year, according to Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“The market, however, is growing increasingly sceptical.  This is partly due to the improvement in the economic climate in Japan and partly because of the actions of the BoJ itself.  If the BoJ does signal more conclusively that it is prepared to follow the trend of most other G10 central banks and start to back out of its extremely accommodative policy position this year, this could trigger a significant move higher in the JPY.  As yet, however, there is insufficient evidence that the BoJ intends to significant alter its QQE programme.  For that that reason we maintain a 12 mth USD/JPY forecast of 116.  However, we are watching the BoJ carefully and the next policy meeting on January 23 can be expected to attract significant market attention.”

“This week the BoJ caught the attention of the market by slightly reducing bond purchases in both the 10-15 year and 25-40 year sectors. The move immediately reinvigorated speculation that policymakers could be signalling a less enthusiastic approach to its QQE programme.  The move, however, is likely to have been technical.  The focus of the BoJ’s QQE programme is not to purchase a set amount of bonds but rather to keep the 10 year yield around zero.  The size of the BoJ’s bond purchases in any period will therefore be a function of level of yields prevailing in the market at any set time and a reduction in the size of purchases therefore does not on its own necessarily signal a change of policy.  At the Jackson Hole Central Bankers Event in August, Kuroda commented that “since JGBs remaining in the market is going to decline, that means that with one unit of JGB purchase, the impact on the interest rate could be bigger."  The implication is that a trend of falling JGBs could emerge, despite there being no change in BoJ policy.” 

“While the size of this week’s JGB purchases may not be enough to signal a change in policy, the market is currently of the view that there may be no smoke with fire. To some extent Kuroda is to blame for this since he used the phrase “reversal rate” in a speech in November.  Although he has subsequently denied that he is endorsing anything other than a continuation of extremely accommodative monetary conditions, the use of this phrase heightened prevailing concerned about the impact of low yields on bank profitability and on the likelihood of lenders to provide credit.  In addition to the concerns about the side-effects of QQE, the strength of growth in Japan’s economy is adding fuel to the debate about BoJ policy this year.”  

“Yesterday the Japanese press reported that sources are suggesting that the BoJ is considering raising its economic growth forecasts for the year through to March 2019 on the back of robust export figures. The figures that has been cited suggest that the forecast for growth in FY2018 could be raised from 1.4% to 1.5%-1.9%.  This could be announced on January 23 after its 2 day policy meeting.  Japan last year proved to be one of the global economic success stories of 2017.  Reports that investment will be boosted ahead of the Tokyo Olympics in 2020 and that some domestic firms could report record earnings is adding to the sense of optimism.  Whether or not firms will use cash reserves to increase wages for workers, however, remains debatable.  This could have a significant impact on the inflation outlook in the coming years and on the reactions of the BoJ.”  

“Despite severe labour market shortages, wage inflation in Japan remains extremely low. Real wages registered a small 0.1% y/y rise in November.  This was the first increase in 11 months.  Nominal total cash earnings rose 0.9% y/y marking the fourth consecutive monthly rise.  The fact that overtime hours have now risen for 11 consecutive months and that the proportion of part time workers declined in November suggests that conditions are ripe for stronger wage inflation.  However, the disinflationary mind-set in Japan has proved notoriously difficult to break for years.  Although higher oil prices will give some upward push to CPI inflation, the BoJ will be hoping that higher wages will bring in a higher demand component to stronger inflation.  In November national CPI inflation registered just 0.6% y/y, with core CPI hitting 0.9% y/y.  While inflation is still a long way below the BoJ’s target, both these data were stronger than the median forecast.  Our forecast for a high USD/JPY this year assumes that the BoJ will remain committed to its QQE policy.  However, we will be watching the central bank carefully.”