Don’t buy the BoJ blus­ter

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

Haruhiko Kuroda, the Bank of Ja­pan Gov­er­nor, has presided over a pick-up in do­mes­tic de­mand and seems loath to have it ex­tin­guished by a global growth scare. Last week he hinted that he was ready to do more, and sub­se­quent press leaks point to a fur­ther ex­pan­sion of his quan­ti­ta­tive eas­ing pro­gram. One rea­son to think a big ba­zooka may be rolled out at Thurs­day’s pol­icy-set­ting meet­ing is that a month ago the BoJ mildly ex­panded its QE op­er­a­tion to a deaf­en­ing si­lence; since then the yen has risen 3.5% against the dol­lar, while the Nikkei 225 is down about -11.5%.

It re­mains to be seen if the re­cent wild ride in mar­kets presages a global growth crunch. What is clear is that emerg­ing economies are in a tight spot, US credit mar­kets look sick and China con­tin­ues to send mixed sig­nals about its cur­rency pol­icy.

Mon­day saw the re­lease of less than stel­lar eco­nomic data from the eu­ro­zone. Such a weak global sit­u­a­tion can only hurt Ja­pan’s ex­port-heavy econ­omy, es­pe­cially if the yen con­tin­ues to see safe haven flows. Such ar­gu­ments will be weighed heav­ily on Thurs­day as the BoJ con­sid­ers a pre­emp­tive move to sup­port mar­kets.

There is also a political logic that points to more eas­ing. Goos­ing equity prices has been a key el­e­ment of Prime Min­is­ter Shinzo Abe’s strat­egy to shore up sup­port for his political goals (the im­me­di­ate con­cern is a fur­ther un­pick­ing of Ja­pan’s paci­fist con­sti­tu­tion which needs a two-thirds ma­jor­ity in both leg­isla­tive cham­bers). Abe may be mulling a snap elec­tion in a bid to con­sol­i­date sup­port for his pro­posed changes and he must deal with Up­per House elec­tions in July. In re­cent years there has been a clear cor­re­la­tion be­tween stock prices and Abe’s pop­u­lar­ity, so rest as­sured he will not op­pose fur­ther mon­e­tary stim­u­lus.

Such a Machi­avel­lian cal­cu­lus may dove­tail with the BoJ’s less political pri­or­i­ties. The BoJ will be happy to pare the yen’s ap­pre­ci­at­ing bias, for this will neg­a­tively im­pact on­go­ing wage ne­go­ti­a­tions that are seen as cru­cial to the do­mes­tic re­fla­tion goals. The lat­est Tankan sur­vey sug­gests that any strength­en­ing of the yen be­yond JPY 118 to the dol­lar will dis­suade com­pa­nies from hik­ing wages, re­gard­less of labour mar­ket tight­ness. For th­ese rea­sons, we think it likely that the BoJ will boost its mon­e­tary stim­u­lus sooner rather than later. The next ques­tion is whether such a pol­icy will be ef­fec­tive.

We have pre­vi­ously ar­gued that the do­mes­tic out­look for Ja­pan, while not spec­tac­u­lar, is good enough for cor­po­rates to put their huge cash piles to work in a pro­duc­tive man­ner. In fact, Ja­pan was a stand­out per­former in the lat­est eco­nomic sur­prise in­dex com­piled by Citi. And de­spite re­cent mar­ket ruc­tions, we are not con­vinced that global fun­da­men­tals have de­te­ri­o­rated on a scale seen in 2008, which is what mar­kets are pric­ing in. Thus, in a sce­nario where the global econ­omy mud­dles through, ad­di­tional BoJ eas­ing would end up be­ing counter-pro­duc­tive if it fur­ther boosts ex­porters, but in good mer­can­tilist fash­ion im­pov­er­ishes con­sumers.

Lastly, there is the ques­tion of whether the BoJ has the ca­pac­ity to move the mar­ket in the di­rec­tion it wants. Cur­rent po­si­tion­ing in the fu­tures mar­ket sug­gests that in­vestors don’t be­lieve that the BoJ can stem yen ap­pre­ci­a­tion. The unit’s 30% de­pre­ci­a­tion over the last three years has al­ready made it one of the world’s most un­der­val­ued cur­ren­cies when mea­sured in real terms. The ef­fect can be seen in Ja­pan’s cur­rent ac­count which is de­ci­sively back into sur­plus ter­ri­tory. Also, there is a wide­spread view that the BoJ is near­ing the tech­ni­cal lim­i­ta­tions of its eas­ing pro­gramme. As such, it may be that even if Kuroda does pull out his big ba­zooka, the mar­ket is not greatly moved.

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