BOJ likely to keep pressure on yen in 2015

Tokyo

FINANCIAL markets face many uncertainties as they enter 2015, but the one thing they can be quite certain of is Bank of Japan (BOJ) governor Haruhiko Kuroda's determination to keep pumping untold trillions of yen into the world's third-largest economy.

His plan, which he again announced over the New Year, has obvious implications for currency markets in that it signals further yen weakness; for equity markets, it suggests higher Tokyo stock prices.

What is not so obvious is why he is going to such lengths to convince the world he will do anything it takes to achieve his ends.

The BOJ could be said to have "over-delivered" on monetary easing, chief global economist Paul Sheard at Standard & Poor's in New York told The Business Times; yet, in a Christmas interview with Japan's Mainichi newspaper, Mr Kuroda repeated the central bank's readiness to carry out further monetary easing.

There may be more behind this than commonly supposed, analysts say.

It is not simply that the BOJ chief needs to save face by meeting his globally declared annual inflation target of 2 per cent, but that he needs to ensure that the yen stays at a level where investment and wages can rise again.

Only by holding the yen comfortably below the 100-to-the-dollar level - it is now at 120 - and preventing the kind of appreciation that sent it soaring to as high as 79 several years ago can the BOJ convince Japanese firms that sudden yen shocks are a thing of the past, some say.

This is critically important now in the run-up to the annual round of spring wage negotiations, or shunto. Many firms are showing a strong reluctance to raise basic wages out of fear that the yen's weakness - which has boosted their export profits - may be temporary.

Larger firms are also wary of bringing back huge cash resources held offshore to finance new capital investments because they are unsure about whether the yen could suddenly appreciate again, thus rendering exports from new domestic production capacity uncompetitive.

Unlike the US Federal Reserve, the BOJ does not consciously target employment levels or wage levels in its monetary policy. Instead, Japan's central bank and the Japanese government appear to be working together almost as one under Mr Kuroda and Prime Minister Shinzo Abe.

Monetary policy and fiscal policy have effectively been "fused" under this joint leadership, said former Goldman Sachs Asia vice-president Kenneth Courtis; this means that the BOJ is focused not just on an inflation target, but also on wider macro-economic goals.

"If the BOJ loosens its commitment just because it is difficult to achieve the price target, that in itself will make it impossible to meet the price target," Mr Kuroda had said in his interview with Mainichi, in a reference to the need to boost inflation expectations in Japan.

In the interview, he ruled out the possibility of watering down the central bank's commitment to hitting its inflation target in the fiscal year beginning April 1, 2015, a move advocated by some BOJ policymakers who believe the target to be too ambitious.

Yet, S&P's Mr Sheard says that the BOJ could already be said to have done more than enough to push up demand and prices in Japan by launching a second round of quantitative monetary easing last October, even as Mr Abe prepared to keep fiscal policy loose by postponing a second sales tax hike.

Mr Kuroda's "propaganda" about the BOJ's determination to do all it can to achieve the inflation target is designed not only to convince Japanese consumers and investors that deflation has ended, but also to convince markets that they had better not bet against the weak yen, some say.