Kuroda Yen Warning Signals ‘Shock and Awe’ Phase May Be Over

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Bank of Japan Governor Haruhiko Kuroda’s missive that there’s no reason for the yen to drop further, now that it’s “very” weak, raises a potential hurdle to the additional monetary easing that economists have been projecting.

Kuroda Wednesday gave his clearest signal since embarking on an unprecedented asset-purchase campaign in April 2013 that Japan’s currency has now fallen enough. “The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come,” the governor said in remarks to parliament.

The comments add to a narrative developing from Japanese officials that the yen has now fallen sufficiently, after its trade-weighted exchange rate returned to levels before the 2008 Lehman Brothers collapse. The economy and finance ministers in recent weeks warned against volatile declines in the currency.

For the BOJ, which has yet to achieve its 2 percent inflation target, any move to add stimulus at a time when the Federal Reserve was raising interest rates could tip Japan’s currency into yet further declines. While Kuroda made clear that the yen’s drop has been good for Japan, it has posed increasing problems for importers and smaller companies.

Shifting Stance

“Chances have come down” for the BOJ to step up asset purchases in October, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo. October has been the favorite pick among economists in Bloomberg surveys for Kuroda and his colleagues to unleash a third wave of stimulus. Shirakawa added that he’s now reexamining his outlook.

Shirakawa, who used to work at the Japanese central bank, said of BOJ policy makers that “their focus is shifting from a kind of shock-and-awe to the durability and sustainability of easy monetary policy. They don’t want the market to be surprised and to weaken the yen.”

While the governor reiterated his view that the weakening of the yen has been good for Japan’s economy, he also said that “excessive yen gains have been corrected,” and that it can’t be assumed the currency would drop when the Fed raises rates. BOJ board member Yutaka Harada, a reflationist stalwart, made similar comments in an interview last week.

“It’s true that yen’s level is very weak in real effective terms,” Kuroda said. Real, effective terms measure trade-weighted, inflation adjusted levels.

A disorderly drop in the exchange rate would escalate the cries of complaint from Japanese importers and smaller companies about the higher costs they face on goods from abroad.

Listening Tour

Kuroda plans to travel to Nagano -- a city in central Japan that’s far from the manufacturing export hubs that have benefited from the weakening yen -- on a June 11-13 trip, the BOJ said Wednesday as the governor was answering questions on the currency from lawmakers. The BOJ said he will discuss the economy with local business leaders.

“Kuroda is mindful of growing criticism about a weak yen, as that will raise the cost of imported goods and hit households hard when Japan needs stronger consumer spending,” said Atsushi Takeuchi, a former director of the BOJ’s foreign exchange market division, who is now an economist at the Japan Center for Economic Research in Tokyo. “Kuroda wanted to stop the rapid weakening of the yen. He still holds a view that a weak yen is good for Japan’s economy but he does not want any abrupt moves.”

Yen Trading

The BOJ chief’s comments spurred a 1.4 percent advance in the yen against the dollar on Wednesday. It traded at 122.86 as of 8:17 a.m. Thursday in Tokyo.

Economy Minister Akira Amari on Wednesday evening said that Kuroda didn’t intend to move markets with his comments at the Diet, and that his remarks might have been distorted from what he meant. That suggests the Abe administration wasn’t happy with the yen’s response to Kuroda, wrote Masaaki Kanno, JPMorgan Chase & Co.’s chief Japan economist.

“It appears the government really wants to see a further rise in stock prices, which Prime Minister Abe suggested is a barometer of the success of Abenomics,” Kanno wrote in a note.

The governor is a veteran when it comes to communicating on exchange rates, as a former vice finance minister for international affairs in charge of Japan’s currency policy.

Important Setting

“It must be his honest view that the yen has weakened to some extent relative to the economic fundamentals,” said Kyohei Morita, an economist at Barclays Plc in Tokyo, who underscored that Kuroda made his remarks in the Diet, elevating their importance. “Kuroda’s remarks today lowered the chance that the BOJ will boost purchases of JGBs and will lower interest rates into negative territory.”

Morita projects the BOJ will still take further action, though not until April. He sees added purchases of exchange-traded funds, and a paring of the 0.1 percent interest rate that the BOJ pays banks for excess reserves parked at the central bank to 0.05 percent.

Shirakawa from Credit Suisse agreed that increased purchases of Japanese government bonds may be less likely, with a cut in the interest rate on excess reserves an option perhaps next year.

Some are sticking with their calls for further action sooner.

Seeing More

“Kuroda is feeling uneasy about the pace of yen’s weakening -- it’s coming to a point where the demerits outweigh benefits,” said Shinichiro Kobayashi, an economist at Mitsubishi UFJ Research and Consulting Co. At the same time, if the BOJ doesn’t move in July, “that will mean they aren’t sticking to an initial plan to get to the inflation goal at the earliest time possible. That could disappoint markets.”

The BOJ governor’s remarks could indeed have been an attempt to steer the yen away from a too-weak danger zone that would limit his room to maneuver on monetary policy, according to Naomi Muguruma, an economist at Mitsubishi UFJ Morgan Stanley, which is a separate unit from Kobayashi’s research group.

“The BOJ might hesitate to take action if the yen weakens too far at the time when the BOJ thinks additional easing is necessary,” she said.

Takeuchi at the JCER said that while Kuroda has made clear that there’s no need for further stimulus for now, “he probably won’t hesitate to ease more, even if that would cause a further weakening of the yen.”

Kuroda’s remarks followed by days a gathering of Group of Seven leaders where President Barack Obama denied an anonymous French official’s citation of him saying the strong dollar posed a problem. G-7 finance chiefs had gathered late last month.

With a further strengthening in the dollar threatening more damage to U.S. corporate profits, there could be a confluence of interests against “further meaningful depreciation of the yen and strengthening of the dollar,” Shirakawa at Credit Suisse said.

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