Bank of Japan remains fully committed to its accommodative stance - Wells Fargo

According to analysts from Wells Fargo, the Bank of Japan remains fully committed to its accommodative monetary policy stance. Currency strategists see only modest strengthening in yen valuation this year. 

Key Quotes: 

“Although the Bank of Japan (BoJ) has dialed back the pace of its bond purchases, the message from Governor Kuroda is that the BoJ remains fully committed to its accommodative monetary policy stance. When asked about how the BoJ would exit its current program of easing measures, Kuroda replied that policymakers there “haven’t reached the stage of thinking about how to handle an exit.” In practice, the BoJ has already been purchasing Japanese Government Bonds (JGBs) at a pace that is slower than the prescribed annual pace of ¥80 trillion (Figure 1). Earlier this month, financial markets interpreted a dialing back of bond purchases as a prelude to eventual policy normalization. The yen rallied when the BoJ bought ¥190 billion of long-term JGBs which was slightly smaller than the ¥200 billion purchased in similar operations for most of last year.

“Our currency strategists have noted a possible shift in the market’s focus to place more emphasis on the quantity of BoJ purchases and perhaps less emphasis on interest rates. That said, they would be careful not to overstate the diminishment of trends in bond yields as an important factor driving the yen. Given the BoJ’s repeated commitment to maintaining accommodative monetary policy, our currency strategists see only modest strengthening in yen valuation this year.”

“For now, CPI inflation in Japan remains well below the 2.0 percent target and on that basis we see no reason to doubt the BoJ and its intention to keep its current program of monetary policy accommodation intact.”

“The BoJ is stuck to some extent. When it dialed back its purchases of longer-dated JGBs earlier this month, the surge in the yen was swift. A stronger yen, at the margin, can make it even more difficult for the BoJ to achieve its inflation target. With that in mind, policymakers must be careful not to steer expectations toward eventual policy normalization even a moment too soon. This may have been a factor in the BoJ’s full-throated commitment to maintaining its accommodative stance at this week’s meeting.”

“The Bank of Japan will eventually normalize monetary policy, but it has no intention of telegraphing its intent to financial markets. As our foreign exchange colleagues observed, the market’s focus has arguably shifted to place more emphasis on the quantity of BoJ purchases and perhaps less emphasis on interest rates. Our forecast for slow but sustained GDP growth and below target CPI inflation warrant caution on the part of the BoJ, at least for now. Among our key areas to watch this year will be wage inflation as a harbinger for a broader pick up in prices.”