RoRo and the BoJ | FT Alphaville

RoRo and the BoJ

The Bank of Japan’s monetary policy decision on Friday has been powerfully talked up by analysts and officials alike, with the bank under real political pressure to satisfy market expectations and announce new easing measures that target inflation and growth.

The BoJ surprised markets on February 14 when it announced an increase in its asset-purchasing programme to Y65tn from Y55tn, and an explicit inflation target of 1 per cent. But at its last policy meeting on April 10 it decided not to implement additional monetary easing.

Now however, the bank’s officials seem desperate to talk down the yen while nearly everyone else appears content to believe they can do more than just talk.

There is a strong belief in the market that the April 27 meeting will see further easing measures being taken – expectations point to an increase in asset purchases of Y5tn to Y10tn and an extension of the deadline for asset purchases from end-2012 to June 2013.

Essentially, say Standard Chartered, since “Japan has no fiscal leeway to support growth and needs to enact major budget cuts to get its fiscal dynamics onto a more sustainable path, the focus is on monetary policy.”

And BoJ governor Masaaki Shirakawa certainly wasn’t looking to dampen expectations when he said “the Bank of Japan is fully committed to continuing powerful monetary easing through various measures”, at a recent speech in New York.

Nomura’s Shuichi Obata and Takahide Kiuchi aren’t so confident. They expect major policies, such as the policy rate and the asset purchase programme, to be left unchanged. However they note (our emphasis):

There are concerns that the markets could react negatively if the BOJ made no response, however, in view of the strong expectations on the markets of further easing, the considerable part that BOJ miscommunication had in forming these expectations, and the sharp yen depreciation and share price rises seen following the surprise easing measures in February. A rapid return to yen appreciation and lower share prices could also heighten demands frompoliticians for easing measures. We therefore think the BOJ, while not implementing major easing measures, will look for policies to prevent disappointment on the markets. In our view, the options are to expand the funds-supplying operation against pooled collateral, lower the interest rates on current account deposits, and lengthen the maturity on outstanding Japanese government bond (JGB) holdings.

Then there are analysts who are skeptical about the transmission mechanisms at the BoJ’s disposal generally and argue the improvements in global risk sentiment since February were the main drivers behind yen weakness. From RBC’s Elsa Lignos and Adam Cole:

In the case of Japan, the transmission mechanism is particularly difficult to identify. Forward interest rates are already so low that bond purchases can’t depress them much further. And, compared to other government bond markets, foreign investors own virtually no JGBs (see chart) so wherever the BoJ buys bonds from, it is unlikely to be foreigners (who may then have sold the currency)… That the spike in USD/JPY in February coincided with increased asset purchases by the BoJ was no more than that – coincidence. The real driver was the sell-off in global bond markets

And a quick correlation demonstration via two charts which point to yen strength being decided by global risk appetite: dollar/yen and the Dow Jones Industrial Average, and dollar/yen versus the spread between 2yr US Treasury and JPG yields:

And according to a Nomura survey, the combination of expanding the asset purchase programme by Y5tn and extending the maturity of JGBs to three years is already well priced in, so any further reaction may be muted.

Then there is the question of what Japanese investors would do with their own newly minted cash anyway. Will they send funds overseas in search of yield or keep their money at home? Currently, the carry trade is at a low ebb as there isn’t all that much yield out there (in developed markets, at least) for Japanese investors to hunt for. Not good news for those who seek a weak yen.

Essentially, considering just how long the BoJ has pursued easing measures and the limited length of the impact it has had on the yen (bar a serious weakening between mid-February and mid-March which can be explained by improving risk-appetite), it seems reasonable to argue that more easing now might not be any bar to further yen gains, particularly if the global economy continues to weaken – havens of any sort are in short supply.

Of course, currency movements have a silly number of drivers (not least expectations, as verbal interventions show) but it is very possible that the BoJ really doesn’t have the kind of sway over its currency it might like.

Related links:
Easing into a long yen – FT Alphaville
The Japanese liquidity trap, revisited – FT Alphaville
From the BoJ with love – FT Alphaville
Yen hedging and a (fiscal) New Year party - FT Alphaville