Yen Jostles With Inflation as Trigger for More BOJ Stimulus

  • Kuroda has repeatedly pushed back timetable for 2% inflation
  • Some economists are looking instead to the markets for clues

With Governor Haruhiko Kuroda more inclined to push his inflation target into the future than boost stimulus to meet it any time soon, some economists are taking a harder look at the yen as a potential trigger for further asset purchases by the Bank of Japan.

The thinking: Any significant appreciation in the currency would hurt exports, profits and share prices for the nation’s largest companies. This would undermine the government’s Abenomics program, and quash consumer sentiment and wage gains that Kuroda needs to sustain a "virtuous cycle" of rising prices.

While observers of the Federal Reserve get a little help from Chair Janet Yellen on her plans for U.S. monetary policy, Kuroda is famous for surprising markets. Economists have increasingly struggled to reconcile his confident remarks about future growth and price trends with poor economic data and headline inflation that’s been snuffed out -- at least for now -- by falling oil costs.

Kazuhiko Ogata echoes the views of many when he says “it’s tough to predict the outlook of policy when the BOJ is trying to surprise markets to make the most of its measures.” The Tokyo-based Credit Agricole SA economist says that “Kuroda will continue to give bullish views because he’s trying to influence expectations and you have to discount that.”

Key levels

JPMorgan Chase & Co. economist Masaaki Kanno is among the analysts who suggest keeping a close eye on the foreign exchange market.

“It’s become clear. The next trigger would be the yen, not just a delay in the timing of reaching the inflation target,’’ said Kanno, who is a former official at the central bank. “If the yen strengthens significantly, that would spur Kuroda into action.’’

For much of the second half of this year, the yen has settled into a range centered broadly on a rate of 120 per dollar. HSBC Holdings Plc and JPMorgan predict that the chances of more expansive BOJ policy will rise if the yen heads to 115. Sumitomo Mitsui Trust Bank Ltd. said the currency moving to 110 could prompt action.

It traded at 123.16 at 5:48 p.m. in Tokyo on Wednesday, having weakened this week after a U.S. jobs report that was seen as favorable to an interest rate hike by the Federal Reserve.

The Japanese stock market, which has rallied with the weak-yen regime ushered in by the BOJ’s loose monetary policy, has also been raised as a possible trigger. Any unexpected shock from China or emerging markets that pushed down the benchmark Nikkei 225 Stock Average and Topix share-price index would hurt the aims of Kuroda and Prime Minister Shinzo Abe.

Hideo Kumano, an economist at Dai-ichi Life Research Institute and a former central bank official, said a sharp drop in Japanese stocks would generate political pressure on the BOJ to consider more stimulus.

Fundamentals view

Many economists including those at UBS Group AG and Mitsubishi UFJ Research and Consulting Co. retain the view that economic fundamentals remain the most likely trigger for the BOJ. Some also note, as the central bank itself has, that inflation will emerge as labor shortages propel wages higher.

Until 2012, the yen was trading at about 80 to the dollar, weighing on profits for such companies as Toyota Motor Corp. and Honda Motor Co.

Kuroda can’t afford to have Japan’s large companies cut their earnings forecasts as he has cited high business profits as a source of more investment and wage increases, said JPMorgan’s Kanno.

Large manufacturers expected the yen to be 117.39 on average for the year through March, taking it close to potential trigger levels suggested by some economists. The median of market forecasts compiled by Bloomberg is for the yen to be at 122 at the end of this quarter.

Economists were almost evenly split on the likelihood of more stimulus before the Oct. 30 meeting at which Kuroda and his policy board stood pat. When the BOJ last increased its asset purchase program in October 2014, only three of 32 analysts surveyed by Bloomberg forecast the move.

— With assistance by James Mayger

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