Bank of Japan Has Little Choice but to Continue Stimulus
Japan and the rest of the world are absorbed by the upcoming U.S. presidential election. Donald Trump has been jumping back up in the polls as Hillary Clinton moves closer into the Federal Bureau of Investigation’s (FBI) viewfinder. How is this confusing background affecting the markets?
The last major turmoil to the markets was caused by the Brexit vote in June. The vote in favor of the U.K. divorcing the rest of Europe put heavy pressure on the British pound (GBP), causing rapid fluctuations. The Japanese yen (JPY), on the other hand, seemed like an island of stability and a safe-haven currency.
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Indeed, the Bank of Japan (BoJ) has a big decision ahead about interest rates. All expectations are that the BoJ will not alter its monetary policy, maintaining its target of zero percent for 10-year rates. This will continue to put bearish pressure on the JPY. For the past three years, the BoJ, under Governor Haruhiko Kuroda, has favored quantitative and qualitative monetary easing. But Japan, like Europe, is far from reaching its two-percent inflation target. (Source: “Japan’s inflation target still a distant goal,” EastAsiaForum, October 31, 2016.)
That said, the JPY/USD will likely continue along a bearish path for the yen. Japan is concerned because of its export-driven economy. But the yen has been a bit of a refuge currency since Brexit. The big question now is whether or it will continue to offer safe haven if the U.S. Federal Reserve decides to raise interest rates in the next session.
If the BoJ assumes a hike in the U.S. federal rate, we can expect monetary policy in Japan to remain unchanged. The higher U.S. rate would automatically help curb the yen’s appreciation. Therefore, the BoJ will likely keep zero percent as the target return on 10-year bonds. In other words, there are no big surprises expected.
This is because the higher the yen moves, the more it hurts the Japanese economy. Despite the Japanese government’s haphazard attempts to revitalize the economy, little has happened. GDP growth is stable, but it’s close to zero. Household consumption has stagnated, as reflected by the unusual number of bankruptcies in the retail sector.
Unemployment is lower than in other developed economies, and Japanese families are not confident in spending their money. The only potential source of inflation is the favorable jobs data. This is the only indicator that could—in time—support an inflationary rise. (Source: “Japanese Core Inflation Hits 3-year low,” Financial Times, October 27, 2016.)
