More Easing Won't Help Japan Much, Ex-Currency Official Says

Matter of Time Before BOJ Makes Move?
  • Shinohara says stock declines a result of outside factors
  • Central bank to decide on policy moves at meeting this week

Even if the Bank of Japan adds to already record stimulus at this week’s meeting, the impact may be limited compared with its previous monetary expansion, warns Naoyuki Shinohara, a former high-ranking currency official at Japan’s Finance Ministry.

“Additional monetary easing may have some impact on the stock and currency markets, but it will probably be difficult to have the similar effects that the first and second bazooka provided,” said Shinohara, who worked at the MOF’s international bureau in 2001 when BOJ Governor Haruhiko Kuroda was the top currency official there. In the short run, more fiscal spending is the only option for supporting the economy, he said.

Recent declines in Japanese stocks and a strengthening in the yen are the result of external factors, so easing alone may not produce significant effects, Shinohara said in an interview in Tokyo on Jan. 21. He is also a former deputy managing director at the International Monetary Fund.

The central bank’s board will meet Jan. 28 and 29 and decide whether to add to its asset purchase program as waning inflation expectations, a drop in oil prices and a reversal in the yen’s declines have put pressure on the BOJ to do more.

The BOJ unveiled an unprecedented stimulus program in April 2013, leading to a weaker yen that fueled a Japanese stock market boom. Kuroda surprised investors with a Halloween easing in October 2014, pushing the yen lower and stocks higher.

Careful Monitoring

Kuroda said in an interview with Bloomberg Television in Davos Friday that turbulence in the financial markets hadn’t affected corporate behavior “unduly.” He emphasized that the central bank is “carefully” watching markets for any potential impact on the economy.

Though Japanese shares have been in a slump, on Monday they joined a global rally to halt losses with the Topix index increasing 1.3 percent at the close in Tokyo, extending Friday’s 5.6 percent advance for the first back-to-back gain of the year. Japanese shares have undone most of their gains since the BOJ last eased on Oct. 31, 2014 yet they are still up nearly 40 percent since the stimulus program began in 2013.

The yen, meanwhile, traded at 118.36 per dollar at 5:17 p.m. in Tokyo on Monday, up about 1.6 percent for the year.

Economists, including Atsushi Takeda at Itochu Corp. in Tokyo, agreed with the idea that further easing will not have a major impact on Japan’s stock market and the yen.

“The recent market turmoil has been triggered by external factors, such as the China shock and oil’s plunge. Also, the U.S. rate increase is at a more gradual pace than initially expected and the ECB may apply more monetary stimulus,” Takeda said. “So, it will probably be difficult to get back on the weak-yen trend” even if the BOJ adds to its asset-purchase program.

Shinohara said the side effects of further easing in the medium term will be “very big” and there’s a plenty of reasons for the BOJ to be hesitant about expanding stimulus at this time.

“While bond yields have declined to this extent and the markets are starting to be concerned about the side effects of further easing, there may be less effectiveness of additional stimulus compared with their past monetary expansions,” said Shinohara, a professor at the Policy Alternatives Research Institute of the University of Tokyo.

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