Dear Bank of Japan: So you tried the easing thing a gazillion times… | FT Alphaville

Dear Bank of Japan: So you tried the easing thing a gazillion times…

… might it be time for something (relatively) new? One question that keeps on popping up is, what is stopping Japan from adopting a currency peg a lá the Swiss National Bank? If repeated easing seems to have no real effect why not get explicit?

Essentially, there is little chance of an explicit floor being put in place due to:

  1. International considerations – the US doesn’t like that kind of fixing at all and while Uncle Sam might tolerate a Swiss floor he would likely kick up a fuss if Japan tried it.
  2. Domestic political considerations – the BoJ and the MoF both control different areas needed to put an explicit floor in place and neither is too inclined to play nice with the other at the moment.
  3. And a de facto floor might already be in place, which would mean easing is doing its job already – however, there is no real way to judge that idea. If there is a floor in place near the ¥80 mark then it has only been tested once or twice and, as we have written earlier, the yen’s weakening following BoJ intervention in February may have been pure coincidence — a global risk-on environment reduces demand for yen as a safe haven.

From Saeed Amen at Nomura (with our emphasis):

Whereas Switzerland is a relatively small economy, Japan is obviously a much bigger economy and attempting to place a floor in its exchange rate in such a manner, would likely be much more difficult politically with respect to its partners such as the US, especially at a time when the US and others are trying to encourage exchange rate flexibility with respect to the China’s currency.

From Yujiro Goto at Nomura:

Internal political plays an important role as well as international politics. Decision makers of monetary policy (BOJ) and FX intervention (MOF) are different in Japan, making SNB like intervention more difficult.

There is a discussion on amending BOJ law now.

Some say the government should allow BOJ to purchase foreign bonds to influence FX by way of compensation for a stricter inflation target. However, the process of changing BOJ law just started and it is not clear the government will decide to amend (Noda has been saying clear NO against the idea). MOF will strongly resist the idea of allowing BOJ to do FX intervention. Thus, I do not think the government to allow BOJ to purchase foreign bonds anytime soon.

They can use JPY70trn ($900bn) under current upper limit and probably happy with the situation. We expect Japan to intervene again if USDJPY declines below 78 and the most important level for Japan is probably 75.

And the BoJ may resist any government demands to increase purchases anyway. It has been suggested it could view such a move as letting the MoF off the policy-making hook, allowing it to escape making painful reform decisions.

From an Nomura research note Mr Goto published last September (and which he says he still holds to):

In addition, the BOJ may strongly oppose the government’s demands to increase its T-Bill purchases to help “unlimited interventions” by the MOF because it could blur the boundaries between the central bank and the government (the decision by the MOF to intervene in the FX market automatically boosts the balance sheet of the BOJ and eases monetary conditions). As a result, the BOJ may feel that its independence from the government is threatened… we do not expect any such development in the near future.

And Geoffrey Yu at UBS also believes there is already a de facto floor in place, arguing the BoJ’s scope to intervene could have been agreed a long time ago:

I think a floor is already in place, but unlike the Swiss, they know they are in a stronger position to defend it, so no longer need to announce it officially. Positioning is also quite clear right now, so using rhetoric and rinban alone may provide enough cover.

.. if you look at a USDJPY chart this has been the case, but there is just more flexibility compared to the SNB because of the enforcement angle. BOJ executes intervention only they don’t have a say in when and where, think this has been agreed upon a long time ago and not a whole lot BoJ can do about it. Market knows their independence has been steadily eroded in any case. I think inflation target is also an implicit floor because now any policy action (easing, FX) can be deployed using the target as justification.

Related links:
Kicking a central bank when it’s down – FT Alphaville
RoRo and the BoJ – FT Alphaville
Another repeat from the BoJ – FT Alphaville