Markets now fully focused on BOJ’s policy errors

After months of underlining BOJ’s blatant policy errors in this publication, in trying to suppress long term interest rates, last week we saw markets finally fully focusing on this issue. Indeed, reports suggesting that some macro funds are building a sizeable short positions in longer dated JGBs, expecting the central bank to eventually capitulate and allow market forces to determine longer term rates drew much attention by the investment community.  

To be sure, BOJ’s latest meeting brought no policy change which led the yen to weaken to its recent lows against the US dollar. Japan’s central bank governor, Mr Kuroda did however finally acknowledge that the bank’s misaligned monetary policy “could be a factor” in weakness of the yen, stating what has been obvious for some time. 

His recent U-turn in also admitting that the devaluation of the yen is actually negative for the economy was followed by yet another misleading statement that this is because the volatile currency markets make corporate planning more difficult. However, he made no reference at all to its far more crucial impact on rising import costs that have led to Japan’s widening trade deficit to its eight-year highs, its negative repercussions on household budgets or its downward pressure on real wages. 

This came after his previous week’s statement, underlining a recent survey indicating that Japanese consumer are more willing to accept higher prices as a sign that his looser monetary policy is working. He was later forced to apologise after drawing heavy criticism by the public and some law makers pointing out that it is his policies that are partly responsible for further fuelling higher inflationary expectations which have now hit a seven-year high. Indeed, an unprecedented survey by Kyodo News published last week found that 59% of respondents deemed Kuroda to be unfit for the job. 

Another of his questionable assumptions is that Japan’s inflation will remain subdued around 2% for the foreseeable future. This assumes that Japan somehow operates outside of global markets and the country will miraculously escape higher inflationary pressures gripping other major economies. Indeed, with double-digit price hikes for over 8,000 household items on the offing from this month on, we would not be surprised at all to see Japan’s inflation gauge rising towards 5% level in the second half of this year. 

With Kuroda’s head buried firmly in the sand while almost all other major central banks are hiking rates, the odds that the dollar/yen rate will be trading well above 140 level is rising rapidly and any currency intervention by MOF to halt the yen’s devaluation would likely be deemed as a shorting opportunity. This scenario could also spark an Asian currency contagion which could spread to all other emerging economies. Come what may, we continue to believe that the BOJ will be forced to abandon its easy monetary policy soon and its governor will likely step down well before his term ends next April.