Analysts and reporters who cover the Bank of Japan have had a maddeningly quiet few years. That’s about to change.
The years 2013 and 2014 saw an explosion of BOJ action as Governor Haruhiko Kuroda opened fire with his monetary “bazooka.” That’s how traders termed the BOJ’s blasting the equivalent of nearly US$800 billion into the economy per annum and loading up on government debt and other financial assets.
Since then, things have been quiet for the most part. Other than the odd tweak in the asset purchases, Kuroda and company sat back and watched a 30% yen depreciation do its magic to revive growth.
BOJ back in the firing line
The year ahead will bring the BOJ back into play in unpredictable and potentially turbulent ways.
It started with last month’s “flash crash” in the dollar-yen rate, which has seen the yen rally 6% since October; on one day, it skyrocketed 3.5% in minutes. The turmoil sent stocks tumbling, producing the first annual loss in the Nikkei Stock Average in seven years – down 12%.
Now, as business and household sentiment slide in unison, BOJ officials are hinting at fresh bazooka blasts. “If the economy falters or recession risks heighten, the BOJ would need to act,” a top central bank official told Reuters for a January 9 story.
Blame Donald Trump. The US president’s trade war contributed to the 2.5% contraction in annualized third-quarter Japanese growth. The yen’s surge since then owes to Trump’s brawl with the Federal Reserve, which was hiking interest rates long before he came along. Trump has intensified attacks on hand-picked Chairman Jerome Powell.
Trump blames Powell for stock market volatility caused by his own erratic and scandal-plagued White House. Even if Powell stands his ground, the virulence of Trump’s jawboning – including calling the Fed’s “crazy” – is seen as limiting future tightening moves. As the dollar slides amid changing perceptions, Japan’s export competitiveness is evaporating.
A new BOJ survey of households, meantime, finds that perceptions about the outlook over the next 12 months are the lowest since Abe took office in 2012. In other words, gloom about wages and future prosperity have now gone full circle.
In the BOJ’s November 9 to December 5 poll, it found that 40% of responding households see worsening conditions, while fewer than 8% remain optimistic. Fully 33% expect wages to drop.
What a difference a year makes. In January 2018, Kuroda’s team was telegraphing an end to history’s biggest quantitative-easing experiment. It wasn’t a matter of “if,” but “when” – and “how aggressively.” First tapering, then the start of a clear and steady withdrawal from the BOJ’s 50% share of the government bond market and 75% ownership of exchange-traded stock funds.
An attack on appreciation?
Taper talk is quickly swinging to easing chatter. There’s an open question of how much good that might do. After all, the BOJ’s epic stimulus efforts only got us about halfway to the 2% inflation target. Nor did the yen’s drop, which produced record profits for giant exporters, catalyzing executives to fatten paychecks.
Even so, Kuroda’s team is best suited to counter speculators betting on a continued yen upswing. The yen could easily jump to 100 versus the dollar in coming months from 108 now, Kazuo Momma, a former BOJ executive director, told Bloomberg. Expect Kuroda to strategize with Finance Minister Taro Aso on ways to chasten yen bulls, including threatening to intervene to sell yen.
Any move to soften the yen would irk Trump, putting the BOJ in the president’s Twitter crosshairs. It would be better, of course, if Abe pursued supply-side reforms to restore national competitiveness. Bold talk of generating a startup boom, empowering women and cutting bureaucracy has amounted to too little six years on.
Yet Abe’s Liberal Democratic Party continues to rely on BOJ cash. That’s why, for better or worse, Kuroda and company are back on the job – bazookas locked and loaded.