Pressure on BOJ’s Kuroda to resign is only intensifying

The yen’s latest plunge is reportedly making BOJ governor’s last few months at the helm very difficult. As we have long argued, we think BOJ simply does not have enough time to see Kuroda-san off in April next year and then pivot away from its super loose monetary policy stance. We think we are getting much closer to this inflection point and why we continue to recommend a notable long exposure to Japan’s banks and insurance stocks which should benefit from this pivot. 

However, given how deeply entrenched Kuroda-san now is regarding the current inflation spike in Japan which he still believes will prove transitory, we think probability of his resignation is only rising, especially as Kishida government’s popularity has been plunging on rising household costs. With the BOJ chief seemingly more worried about his Kuronomics legacy, we have argued that this hubris could prove costly for the yen as more central banks shift towards a more neutral or restrictive monetary policy regime. 

With MOF officials now hinting that an intervention in the currency market could be imminent, the yen regained some of its losses of last week on Friday but looks likely to hold above the 140 level against the dollar. As we have argued, any forex intervention will likely to have only a short-lived impact and would give currency traders more opportunity to sell the yen. This is especially so as Fed has ruled out any help as the dollar is strong against all other major currencies and this trend is helpful in lowering US import bills. 

As long as BOJ pursues what we have long deemed to be a grave policy error in not allowing JGB yields to be determined by market forces, the yen will remain hostage. However, what is truly shocking is that the BOJ governor refuses to acknowledge the fact that the weaker yen is eating into household incomes and is threatening to derail Japan’s consumption recovery post Covid. 

Last Friday, he continued to suggest that wild swings in the yen is not desirable simply because it makes corporate planning more challenging. This disingenuous explanation speaks volumes of how much pressure Kuroda is under to try to explain away the weak yen and to argue that it is not a result of his policies that are causing this currency rapture. 

However, more domestic economists are now raising doubts about BOJ’s muted outlook for Japan’s inflation rate next year, something we have also argued in the recent past publications. This is especially so as minimum wage hikes of 3% are starting to take hold while Japan’s labour shortage will likely become problematic again as we go back to post-pandemic norms as it is being observed elsewhere in the West where wage inflation has become more entrenched. 

With BOJ fighting market forces in intervening in the JGB market to keep the long term rates artificially low while MOF is now threatening to intervene in the currency market to offset the impact of the central bank’s policy, the comedy of these likely futile market interventions in Japan has not been lost to us.