Bank of Japan Review and Interpretation

June 11, 2013

The Bank of Japan’s decision not to expand monetary easing in general or take direct action against higher long-term interest rates in particular triggered a rather violent adverse market reaction, all of which was opposite in direction to the broad goals of quantitative and qualitative monetary easing.

  • Last November when the genesis of massive monetary easing to end deflation was first espoused by Shinzo Abe, who successfully returned the LDP to political power, the yen was trading in the high 70’s against the dollar.  Although never prioritized as the purpose of unlimited quantitative easing, yen depreciation was acknowledged as a logical by-product of the policy.  By the time of the policy’s launch on April 4, the yen had retreated to 96.4.  It had hardly declined further on balance to 98.75 at yesterday’s close in the New York market and overnight recorded gains of 1.8% against the euro to 128.41 and against the dollar of 2.0% to 96.79.
  • An explicit objective of monetary policy is to maintain downward pressure on long-term interest rates even as real economic growth strengthens and inflation turns positive.  This year’s low of 0.38% on the 10-year Japanese government bond (JGB) was touched just after the current policy was launched.  Contrary to plan, such had climbed almost threefold to a peak of 1.00% in late May.  Although below that level now, a point Governor Kuroda made in disputing an urgent need to take new direct action to depress long-term rates, it rose five basis points to 0.88% today.
  • Japanese share prices have become the best barometer of investor confidence in Abenomics as a strategy that will restore sustained price stability around an inflation target of 2.0%.  The Nikkei-225, which initially advanced 80% from 8661 on November 13 to 15627 on May 30, had already retreated subsequently by 15.3% to 15239 on June 10 and dropped by 1.5% today.

What caused the market’s disappointment?  An aggressively stimulative monetary policy was not watered down.  Quantitative easing is proceeding at a pace that will double the monetary base within two years largely through buying JGBs at an annual pace of about 50 trillion yen and that will engineer a rise in the average maturity of the BOJ JGB portfolio to seven years from three.  The problem, rather, is that monetary officials have settled into an institutional pattern of eschewing frequent modifications in policy, preferring big but infrequent adjustments.  Investors believe that specific steps to reduce long-term rates are required at this juncture and, as one example, were hoping that the fund-supplying operation might be extended for a second year.  This did not happen, even though a statement was released spelling out the terms for JPY 3.152 trillion operation to be done on Thursday next week.  Investors are also not inspired by what they’ve heard regarding the government’s plans to implement deregulatory reform.  Without such, wage inflation could lag price inflation, trimming real consumer purchasing power and therefore short-circuiting the demand-led mechanism to achieve positive inflation.

In today’s main statement released by the Policy Board, much of the text reads exactly as did the prior statement of May 22.  The vote on policy settings was unanimous.  The vote to “achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner” passed by an 8-1 majority over the alternative proposal of Mr. Kiuchi to “achieve the price stability target of 2% in the medium- to long-term and designate quantitative and qualitative monetary easing as an intensive measure with a time frame of about two years.”  He wanted a predetermined latest possible exit date, but the majority prefers an open-ended commitment to QE for as long as it takes to achieve the inflation objective.  What’s new about today’s statement is that the economic assessment was upgraded further to “has been picking up” because of a better view about exports and industrial production.  A second change in the outlook is the deletion of a predicted near-term period of continuing negative inflation.

According to a released schedule of future Board meetings, the next will be on July 10-11 and the meeting in August will take place on the 7th and 8th.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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