BoJ: Kuroda watching? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that BoJ Governor Kuroda used yesterday morning’s post policy meeting press conference to drive home a dovish message.

Key Quotes

“The yen softened immediately in response to his comments but the move proved to be short-lived.  The yen’s sustained firm tone suggests that the market continues to entertain the view that the BoJ are preparing to back away from its hugely accommodative QQE programme in the foreseeable future.  We see risk that the market will be disappointed, though Kuroda will clearly have to work hardly to drive his dovish message home.”

“The BoJ made very few adjustments to its outlook for economic activity and prices this month. It stated that “comparing the current projections with the previous ones, both the projected growth rates and the projected rates of increase in the CPI are more or less unchanged”. Counter to reports in the Japanese press earlier this month, the BoJ steered away from upgrading its growth forecasts despite clear signs that the pace of economic activity is powering ahead.  This week the IMF raised its projection for Japanese 2018 growth by 0.5 ppts from its October forecast to 1.2% y/y.  Earlier this month a press report raised speculation that the BoJ may revised its forecast for FY18 from 1.4% to 1.5%-1.9%.  It can be inferred that the BoJ’s decision not to alter its projection on growth could be linked with a reluctance to appear less dovish.” 

“Kuroda certainly attempted to play down the BoJ’s smaller bond purchases earlier this month. The move had immediately reinvigorated speculation that policymakers could be signalling a less enthusiastic approach to its QQE programme. Kuroda made clear that the target of the BoJ’s bond buying programme is the yield curve and not the amount of bonds purchases.  The BoJ has outlined that the current pace of purchases mean there is likely to be an annual increase in the amount outstanding of its JGB holdings of about 80 trillion yen.  However, the exact amount of JGBs purchased is secondary to its aim of keeping the 10 year yield close to zero.”

“This is where the BoJ’s programme differs significantly from that of the ECB.  At the Jackson Hole central bankers’ event in August, Kuroda has already 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 purchases could emerge, despite there being no change in BoJ policy.”

“Despite the dovish language on policy Kuroda did concede last morning that pressure for wage rises is increasing steadily. It could be argued that Kuroda’s optimism on this front could be linked with the BoJ attempt to break Japan’s disinflationary mindset. That said, there are yet only limited signs of wage inflation in Japan despite severe labour market shortages.  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 BoJ has fought a long and hard battle against deflationary risk and the disinflationary mindset.  For this reason, the BoJ adheres to a commitment to overshoot its 2% price stability target.  Through this commitment, the Bank aims to enhance the credibility of achieving 2 percent among the public which it hopes will help feed a pro-inflationary cycle.  It would appear hasty and foolhardy for the BoJ to risk crushing tentative signs of inflation by withdrawing policy stimulus too early. We continue to see scope for the BoJ to drive home its dovish message and undermine JPY bulls.  Our forecast for a higher USD/JPY this year (our 12 mth forecast is 116.00) assumes that the BoJ will remain committed to its QQE policy.”