Bank of Japan likely to go for broke on monetary easing

Tokyo

IS Bank of Japan (BOJ) governor Haruhiko Kuroda on course to launch a new monetary easing "bazooka" at the end of this month as Japan's economic recovery sputters, the Tokyo stock market crumbles, and the yen shows worrying signs of strengthening while other currencies plummet?

Yes, says a growing body of opinion in Japan as the date of the BOJ Policy Board's next monthly meeting on Jan 28-29 draws near, with leading analysts and Japanese media increasingly looking to Mr Kuroda to re-establish his credentials as a strong monetary activist.

"I expect the January meeting to bring the return of a proactive, pro-growth BOJ - a central bank confident in both its tools and targets," said veteran Japan analyst Jesper Koll, CEO of investment firm Wisdom Tree Japan, in comments made available to The Business Times.

"I am convinced that Governor Kuroda will live up to his explicit promise that there are no limits to what the BOJ can do, and that the BOJ will act without hesitation to achieve the price stability target of 2 per cent at the earliest possible time," he added.

Chief currency strategist Tohru Sasaki at JPMorgan Bank in Tokyo and a former BOJ official said meanwhile that he "does not rule out" the possibility of the BOJ easing this month if the yen stays at current levels (of around 117 to the dollar) and that, in any case, the central bank will ease by April at the latest.

A return to proactive "Kurodanomics" following two massive earlier quantitative easing (QE) exercises would have considerable implications for markets and could send the yen tumbling again while Tokyo stocks would reverse their recent plunge, some analysts say.

Mr Kuroda has taken recently to sending what some see as coded signals to markets that further monetary easing is coming soon. He has stressed repeatedly, they note, that the BOJ will "do all it takes" in order to achieve its target of getting annual consumer price inflation in Japan up to the 2 per cent level.

Currently, "core" inflation is running at an annual rate of near zero, owing to the continuing plunge in oil prices. But excluding oil, the inflation rate has climbed from negative territory to around 1.2 per cent since Mr Kuroda launched his two QE exercises after taking the helm of the BOJ in early 2013.

Senior Japanese government officials have indicated that they are satisfied the BOJ is on course towards achieving its price goals. So Mr Kuroda's repeated pledges to "do all it takes" are seen more as a signal that the central bank will not tolerate continued appreciation of the yen than as an inflation pledge.

The yen's recent rise to around 117 to the dollar from well under the 120 level late last year and its recent strength relative to other leading currencies have had a damaging impact on corporate sentiment in Japan, analysts say.

Yen appreciation or endaka risks reversing the gains the Japanese corporate sector has enjoyed from previous sharp depreciation of the currency in the form of enhanced export profits. That could cause firms to resist BOJ-supported government calls for increased capital spending and wage payouts.

In a report earlier this week, the BOJ noted that "many small and medium-sized companies in regional areas remain cautious of raising regular pay for permanent employees" because of uncertain prospects including a possible further surge in the value of the yen.

"We are not alone in calling for likely BOJ action in January," said Wisdom Tree Japan's Mr Koll, former chief equity strategist at JPMorgan Chase Bank in Tokyo and a former Japanese government adviser, in his commentary.

"Last weekend, the Nikkei Veritas - a major retail-investor focused weekly newspaper - predicted the coming of a new 'Kuroda Bazooka'," he noted.

"So now, the market is expecting something in January. The risk of doing nothing could quickly re-enforce bearish market momentum - the yen would probably strengthen, dragging down Tokyo stocks."

The upcoming meeting of the BOJ Policy Board, said Mr Koll, "is not just about how to respond to a growing asset deflation shock, but about how does the BOJ define its mission. Are they really operating at the limit of what monetary policy can do? Or do they have what it takes to complete the task of ending deflation and help put Japan back on a sustainable growth path?"