Pressure on Bank of Japan’s policy framework?
Though the drop in the yen has Japanese policymakers immensely pleased, another aspect is putting pressure on the Bank of Japan’s newly introduced QQE (quantitative and qualitative monetary easing) with yield curve control.
Interest rates around the world have risen. This is making the Bank of Japan’s task of keeping a cap on the yield curve more difficult. In a general uptrend in yields, it becomes hard to keep a lid on yields at home. The Bank of Japan is already a sizable player in the bond market due to its purchases of Japanese Government Bonds amounting to about 80 trillion yen per year.
This is giving rise to speculation that the central bank may need to think about raising interest rates soon. Doing this will provide better control to the central bank over the yield curve by taking the pressure off of keeping yields of the 10-year bond around 0%. At the same time, though, a rise in interest rates would be counterproductive to its intention of stoking inflation towards its mandated 2% level.
This is a dramatic and unexpected conjecture given the situation Japan has found itself in for most of this year, especially the introduction of negative interest rates.
Haruhiko Kuroda dismisses talk about rate hike
At the post-policy press conference, Bank of Japan chief Haruhiko Kuroda dismissed speculation about a rate hike, saying that the central bank is not considering an increase in its yield target. He sighted the negative pace of inflation as the primary reason for no possibility of a rate hike at this juncture. The Financial Times quoted him saying “That foreign interest rates are rising so it’s all right for ours to rise in proportion, or that we should raise our operating target — we are not thinking that at all.”
Risks to Japan’s economic outlook
In its monetary policy statement for December, the Bank of Japan cited developments in emerging and commodity-exporting economies, specifically China, and developments in the US economy and monetary policy as major factors posing risks to Japan’s economy. Brexit and the state of debt in Europe also featured prominently as factors which could impact the Japanese economy.
Investors in Japan’s equities (EWJ) can have an interesting year in 2017. However, taking cognizance of the movement in the yen would be crucial and may require investments in currency-hedged investment vehicles (DXJ) (DBJP).