The Bank of Japan must show it is serious about increasing inflation for the yen to weaken further as part of a plan to stimulate economic growth, according to Goldman Sachs Asset Management Chairman Jim O’Neill.
“Classical indicators suggest it’s a little bit oversold,” O’Neill said on “Bloomberg Surveillance” with Tom Keene. The Bank of Japan “has got to show its going to take this 2 percent inflation target seriously. Rather than just a goal, it has to be a target. And I think we need to see continued evidence of the U.S. doing better.”
Japanese Prime Minister Shinzo Abe urged the central bank to double its 1 percent inflation target in an economic and fiscal policy meeting on Jan. 9 to end the deflationary spiral that has weighed on growth. The BOJ will hold its first meeting this year on Jan. 21-22. The yen touched 89.67 per dollar yesterday, the weakest level since June 2010, and has dropped 12 percent since September.
“To get dollar-yen north of 100 and higher we need to see the other side of it,” O’Neill said from London. “We need to see that the BOJ is serious and the U.S. is strengthening despite fiscal tightening.”
Several members of the Federal Reserve’s Federal Open Market Committee advocated cutting the $85 billion monthly buying of Treasuries and mortgage debt in 2013, according to minutes of their Dec. 11-12 meeting released earlier this month. The purchases, the Fed’s third round of so-called quantitative easing since 2008, tend to debase the currency.
The yen rose the most since May versus the dollar today on an intraday basis as Japanese Economy Minister Akira Amari said households and imports may be hurt by a weak currency. The yen appreciated 0.9 percent to 88.72 per dollar at 2:36 p.m. New York time, after trading as low as 89.63.
The Japanese government’s power to appoint a new governor of the Bank of Japan is critical to its policy direction, said O’Neill, who noted that the central bank is coming under unusual pressure from businesses right now.
“If they play their typical role and say ‘we hear you but there’s nothing we can do about it,’” markets might be disappointed, he said. “But the pressure on the BOJ coming from corporate Japan is much bigger than we’ve seen in a long time.”