FXStreet (Bali) - On late Monday US time, news from Reuters
hit the wires speculating that according to people familiar with the
matter, the Bank of Japan may have started to discuss a possible exit
strategy to its quantitative and qualitative easing (QQE) program.
The continuation or suppression of the easing program by the BoJ, which will mark its 14th month anniversary in June 2014, is a subject of debate in all trading desks with an interest to trade the JPY currencies. Up until now, and amid the 'wait-and-see mode' established by BoJ Governor Kuroda, specs have been understandably reducing their bets against further depreciation of the Yen, with the currency being one of the best YTD performers.
Is it really time for the BoJ to start shifting its focus away from its chief inflation mandate to instead focus on supporting growth without major stimulus? The answer would be 'No'. Even if inflation in Japan indicates the BoJ is half way through achieving its 2% inflation target, and with the economy having so far successfully weathered April's controversial sales tax hike, in Kuroda's mind, plans about an exit strategy probably involve quite a lot more than just the inflation goal being met.
The BoJ doesn't just need inflation to hit the 2% mark, that actually is only half its goal, the real mission is to make it sustainable along the 2% line, which would then vindicate that one of Abenomics' main pillar (suppress deflation) has been successfully established, a key step to achieve their own 'virtuos cycle'. BoJ will need convincing evidence that 2% inflation will be sustained, so even if consumer inflation exceeds 3/4 of the target by surpassing the 1.5% by autumn this year, that should not be enough to justify considerations for an exit strategy yet.
The implications on such an assumption would be that while the BoJ may continue to outline progress on the economic/inflationary fronts, extreme cautionary steps will still be taken until greater evidence of consistent upward price pressures and strong consumers' consumption activity is revealed.
Another important element to factor in when speculating on a possible QQE exit strategy, is the fact that BoJ Kuroda aims for a weaker Yen to keep supporting the economic recovery. That means that any premature move to end QQE may have undesired effects on their interest to keep the Japanese Yen at levels that are still seen as comfortably stable for Japanese exporters, while avoiding any big spike in bond yields.
Kuroda will simply try to avoid by all means confusion and volatility in the domestic currency, just as the episode that the Fed caused in May last year when it first signaled 'tapering'. BoJ's interest on a stimulus's withdrawal will be a debate, being optimistic, for April 2015 the earliest, and definitely not something officials will publicly suggest for now.
The term 'wait and see mode' in the arena of central bank's monetary settings could be defined as 'bide one's time for events to run their course'. In the case of the BoJ, that is exactly the phase they are in; even if inflation keeps gradually increasing and consumption firms up, it is quite unlikely to see any major shift in their views towards tighter policies, it simply involves too much risk. I would dare to assume that if anything, risks remain higher on a possible QQE extension should the first signs of a stalling economic recovery arise. That, if it were to occur, would be done with less hesitation than tightening at this point.
While the market is a discounting mechanism that is permanently trying to anticipate future events at present time, so that the effects can be incorporated in today's assets value, one needs certain evidence to keep the 'discount phase' going. While it can not be argued that the elimination of further easing expectations by the BoJ has resulted in a re-adjustment in the Yen value, Kuroda's continuous reminders that the BOJ will not hesitate to ease further if economic recovery appears at risk, at this point, facts are still scarce to get too excited and jump to aggressively on the Yen band-wagon. However, the re-adjustment in expectations alone is and may continue to cause the Yen to recover ground against other currencies that are being threatened by a negative discounting phase, with the Euro (possible QE/negative rates by the ECB) perhaps the most vulnerable at the moment.
The continuation or suppression of the easing program by the BoJ, which will mark its 14th month anniversary in June 2014, is a subject of debate in all trading desks with an interest to trade the JPY currencies. Up until now, and amid the 'wait-and-see mode' established by BoJ Governor Kuroda, specs have been understandably reducing their bets against further depreciation of the Yen, with the currency being one of the best YTD performers.
Is it really time for the BoJ to start shifting its focus away from its chief inflation mandate to instead focus on supporting growth without major stimulus? The answer would be 'No'. Even if inflation in Japan indicates the BoJ is half way through achieving its 2% inflation target, and with the economy having so far successfully weathered April's controversial sales tax hike, in Kuroda's mind, plans about an exit strategy probably involve quite a lot more than just the inflation goal being met.
The BoJ doesn't just need inflation to hit the 2% mark, that actually is only half its goal, the real mission is to make it sustainable along the 2% line, which would then vindicate that one of Abenomics' main pillar (suppress deflation) has been successfully established, a key step to achieve their own 'virtuos cycle'. BoJ will need convincing evidence that 2% inflation will be sustained, so even if consumer inflation exceeds 3/4 of the target by surpassing the 1.5% by autumn this year, that should not be enough to justify considerations for an exit strategy yet.
The implications on such an assumption would be that while the BoJ may continue to outline progress on the economic/inflationary fronts, extreme cautionary steps will still be taken until greater evidence of consistent upward price pressures and strong consumers' consumption activity is revealed.
Another important element to factor in when speculating on a possible QQE exit strategy, is the fact that BoJ Kuroda aims for a weaker Yen to keep supporting the economic recovery. That means that any premature move to end QQE may have undesired effects on their interest to keep the Japanese Yen at levels that are still seen as comfortably stable for Japanese exporters, while avoiding any big spike in bond yields.
Kuroda will simply try to avoid by all means confusion and volatility in the domestic currency, just as the episode that the Fed caused in May last year when it first signaled 'tapering'. BoJ's interest on a stimulus's withdrawal will be a debate, being optimistic, for April 2015 the earliest, and definitely not something officials will publicly suggest for now.
The term 'wait and see mode' in the arena of central bank's monetary settings could be defined as 'bide one's time for events to run their course'. In the case of the BoJ, that is exactly the phase they are in; even if inflation keeps gradually increasing and consumption firms up, it is quite unlikely to see any major shift in their views towards tighter policies, it simply involves too much risk. I would dare to assume that if anything, risks remain higher on a possible QQE extension should the first signs of a stalling economic recovery arise. That, if it were to occur, would be done with less hesitation than tightening at this point.
While the market is a discounting mechanism that is permanently trying to anticipate future events at present time, so that the effects can be incorporated in today's assets value, one needs certain evidence to keep the 'discount phase' going. While it can not be argued that the elimination of further easing expectations by the BoJ has resulted in a re-adjustment in the Yen value, Kuroda's continuous reminders that the BOJ will not hesitate to ease further if economic recovery appears at risk, at this point, facts are still scarce to get too excited and jump to aggressively on the Yen band-wagon. However, the re-adjustment in expectations alone is and may continue to cause the Yen to recover ground against other currencies that are being threatened by a negative discounting phase, with the Euro (possible QE/negative rates by the ECB) perhaps the most vulnerable at the moment.
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