As expected, the Bank of Japan (BoJ) did not announce new easing measures in connection with today’s monetary meeting. However, in its statement it said that the recovery following the earthquake will moderate because weaker exports mean it still sees substantial downside risk. Importantly, the statement still mentions the adverse impact of the strong JPY.
Both the BoJ’s and the government’s fixation with the exchange rate is set to continue, as long as they see considerable downside risk to the economy. However, in our view, intervention is unlikely to happen until USD/JPY is close to 75.
BoJ says the recovery is moderating
As expected, the Bank of Japan (BoJ) did not announce new easing measures in connection with today’s monetary meeting. The O/N target rate was left unchanged at 0.0-0.1%, the limit for its asset purchases programme was left unchanged at JPY20tr (expanded by JPY5tr at the previous meeting) and finally the fixed-rate fund supply operation was also left unchanged at JPY35tr.
The BoJ cut its view of the economy slightly by saying the recovery following the earthquake is moderating due mainly to the adverse effects of the slowdown overseas, including the current flooding in Thailand, which has disrupted many Japanese manufacturers’ supply chains. Importantly, in its statement the BoJ continues to mention a possible adverse impact from the strong JPY.
Hence, the BoJ continues to see considerable downside risk and fears a substantial slowdown on back of weaker exports, even though the economy appears to have recovered relatively quickly in the wake of the earthquake (see Flash Comment: Japan GDP surge in Q3 as Japan recovers from earthquake, 14 November). This is the justification for both the Japanese government’s and the BoJ’s current fixation with the exchange rate and repeated intervention in the FX market.
The policy to stem the appreciation of the JPY will continue, albeit USD/JPY would probably have to fall close to 75 before we see renewed intervention in the FX markets. As has been the case since last autumn, intervention could be backed up by further expansion of the BoJ’s asset purchases. The weakness in the BoJ’s response so far is that, although it has increased the limit for its assets purchases quickly, there are no signs that the pace of the BoJ’s asset purchases has been increased markedly in recent months. As seen in the chart, the expansion of the BoJ’s balance sheet has actually slowed slightly in recent months, while it has picked up substantially elsewhere.
BoJ says the recovery is moderating
As expected, the Bank of Japan (BoJ) did not announce new easing measures in connection with today’s monetary meeting. The O/N target rate was left unchanged at 0.0-0.1%, the limit for its asset purchases programme was left unchanged at JPY20tr (expanded by JPY5tr at the previous meeting) and finally the fixed-rate fund supply operation was also left unchanged at JPY35tr.
The BoJ cut its view of the economy slightly by saying the recovery following the earthquake is moderating due mainly to the adverse effects of the slowdown overseas, including the current flooding in Thailand, which has disrupted many Japanese manufacturers’ supply chains. Importantly, in its statement the BoJ continues to mention a possible adverse impact from the strong JPY.
Hence, the BoJ continues to see considerable downside risk and fears a substantial slowdown on back of weaker exports, even though the economy appears to have recovered relatively quickly in the wake of the earthquake (see Flash Comment: Japan GDP surge in Q3 as Japan recovers from earthquake, 14 November). This is the justification for both the Japanese government’s and the BoJ’s current fixation with the exchange rate and repeated intervention in the FX market.
The policy to stem the appreciation of the JPY will continue, albeit USD/JPY would probably have to fall close to 75 before we see renewed intervention in the FX markets. As has been the case since last autumn, intervention could be backed up by further expansion of the BoJ’s asset purchases. The weakness in the BoJ’s response so far is that, although it has increased the limit for its assets purchases quickly, there are no signs that the pace of the BoJ’s asset purchases has been increased markedly in recent months. As seen in the chart, the expansion of the BoJ’s balance sheet has actually slowed slightly in recent months, while it has picked up substantially elsewhere.