Is the Bank of Japan finished with stimulus?

June 11, 2015 1:50 PM (UTC+8)

 

What is Governor Haruhiko Kuroda thinking?

Seriously, inquiring minds want, nay, need to know. In an address to a group of Japanese legislators Wednesday, the country’s chief banker hinted that the Bank of Japan may be done with injecting stimulus into the economy.

The thing is Kuroda didn’t come out and explicitly say the BOJ was done with its unprecedented quantitative-easing program. Rather, he said the yen was already very weak he doesn’t envision a deeper drop in its value. Specifically, he said because the possibility of a U.S. Federal Reserve Bank interest rate hike is already priced in, he didn’t expect the yen to fall further.

That was enough to send the dollar to a six-month low against the Japanese currency. It boosted the yen off its 13-year low of 125.86 on June 5 to 122.68 late Wednesday. But on Thursday it slid back to 123.32 yen to the dollar. The euro stood at 139.29 yen.

Most of central banking is done by winks and nods and Federal Reserve Chairman Alan Greenspan made an art of obfuscation. Kuroda appears to be following this strategy.

So while some called the comments “careless,” BOJ watchers are trying to decode the true message.

The one truth is that the yen has depreciated by about 30% since Prime Minister Shinzo Abe came into office December 2012.

Already rumors had been milling about that the Group of Seven is not happy with the yen’s devaluation. It let the Japanese ministers know at last week’s meeting in Germany.

Bloomberg suggests: “Kuroda may be signaling to Abe that it’s his turn to revive the economy. Until now, Kuroda has been remarkably deferential to his boss, even as Abe has seemingly lost interest in the pro-growth reforms he has promised to pursue.”

When Abe launched Abenomics it had three “arrows”: 1) monetary easing, 2) large-scale fiscal stimulus measures, and 3) structural reforms. Kuroda was responsible for monetary policy, Abe was responsible for shooting the other two arrows.

The monetary easing has helped the Nikkei stock index rocket nearly 60%, and encouraged investment spending by some Japanese companies.

However, Abe hasn’t done so much. And the little he did, not so well. The fiscal policy was a sales tax hike in April 2014 that sent the economy into a recession. Oops.

Bloomberg suggests accelerating efforts to “lower trade tariffs, alter tax policies in favor of small businesses and startups, and cut red tape.”

Meanwhile, Morningstar reported that a person close to the Japanese government said the Abe administration is quite upset with the remarks.

Morningstar said: “The person said the central bank chief wasn’t speaking for the Abe administration when he made the comments that sparked a sharp rise in the yen. Government officials generally view the finance ministry as having control of foreign-exchange policy and take a dim view of remarks by central bank officials that cause sharp fluctuations in the market.”

It looks like we’ll have to wait a little longer for the signs to get clearer.

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