BoJ’s next challenge could be excessive yen weakness
TOO much of a good thing is now a risk for the Bank of Japan (BoJ).
The BoJ left its key interest rates and asset-purchase programme unchanged yesterday, taking advantage of tailwinds provided by the yen’s recent decline and a pick-up in exports underpinned by firming global demand.
It was a different story as recently as four months ago. For much of last year a stronger yen worked against the central bank’s efforts to reflate the Japanese economy, weighing on prices and cutting into corporate profits that were supposed to fuel investment and wage increases.
Now, with the Federal Reserve having set a firm course down the rate-hike path, excessive currency weakness is seen by some as a threat to the economy.
With global bond yields on the rise, and the BoJ committed to pinning the 10-year Japanese government bond at around zero percent, Morgan Stanley and Standard Chartered are among banks that see the yen declining beyond 120 this year.
That would hurt already beleaguered Japanese consumers, who can expect minimal pay hikes at best, by pushing import prices sharply higher.
Former BoJ board member Sayuri Shirai, in an interview yesterday, noted that when the US dollar rose as high as 125 yen in 2015, corporate profits rose but consumers complained about higher import prices.
“Consumers are very sensitive to food and energy prices,” Shirai, who left the BoJ board last year, told Bloomberg TV.
The UK offers a cautionary tale. The pound sank following last summer’s Brexit vote, producing much-coveted inflation that will near 3% this year, according to the Bank of England. But with wage gains lagging, retail sales fell at the fastest pace in almost five years in December.
A falling yen could be Japan’s biggest domestic risk this year, potentially hurting household spending and triggering political intervention, Ryutaro Kono, chief Japan economist at BNP Paribas, earlier in January.
The currency has pared some of its recent losses as investors reassess the prospects of President Donald Trump’s stimulus proposals and the risk of a trade war, but it remains about 8% weaker versus the US dollar since October. It traded at 113.43 per US dollar as of 2:22pm in Tokyo yesterday.
Further declines would also risk heightening tensions with the Trump administration, whose protectionist stance has raised fears of a hit to global trade.
But BoJ Governor Haruhiko Kuroda could sooner face a backlash at home. In 2015, yen weakness became a political issue in Japan, prompting Prime Minister Shinzo Abe’s government to speak out as elections loomed.
One way the BoJ could ease downward pressure on the yen would be to raise the 10-year yield’s target rate. But central bank officials would rather be late than early in raising that rate, even if consumer price gains reach 1% later this year, according to people familiar with the central bank’s discussions.
The BoJ has a good reason to resist political pressure for quick action to relieve consumers, said Kazuo Momma, an economist at Mizuho Research Institute who left the central bank last year.
“The BoJ was criticised for exiting a bit too early in 2000 and 2006 and for the third time, they are trying to run the policy without any room for criticism,” Momma said. “They are not going to change their easing stance lightly.” — Bloomberg said in a note