Analysis: BOJ Stands Pat, Kuroda Tries to Jawbone the Yen, Volatility Looks Distant

After the monthly monetary policy meeting, Bank of Japan's governor, Haruhiko Kuroda has expressed his views on the recent rally

bojAs the latest press conference of the Bank of Japan  concluded this week, Forex Magnates’ reporters have been observing the numerous headlines from the central bank’s governor, Haruhiko Kuroda. He stated that while the Japanese yen depreciation is not the goal of current monetary policy, he also sees no reason for its recent strengthening. He proceeded to commit to the BoJ’s policy to continue purchasing vast quantities of government bonds currently standing at ¥7 trillion a month.

After the implementation of the first round of two sales tax increases in the span of a year and a half, the BoJ seems to be committed to continue with its easy policy, however there is great likelihood that it is not going to be enough to reflate the economy. The resulting FX volatility has resulted in Japanese brokerages GMO Click, DMM Securities and Monex reporting record volumes in the first half of 2013. However since then we have seen that the Japanese yen’s decline has flattened and since the start of 2014 it has actually rallied somewhat.

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While Mr. Kuroda painted a rosy picture that the Japanese economy will contract only during the second quarter of this year, he might be underestimating the effects of the BoJ’s own policy and the weakened Japanese yen during the past year.

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The current levels of inflation are still way below the central bank’s target, standing currently at 1.6%, and is mostly due to increased fuel costs for the Japanese economy as it halted the use of nuclear power for electricity generation following the Fukushima fallout. Mr. Kuroda stated that the inflation goal of 2% inflation is still within reach and the bank is committed to stick to it. Expectations of the central bank are that it will reach its goal by the middle of 2015.

japan_wages
Source: GaveKal Capital

Will it be successful in its objective? That is largely dependent on the evolution of wage growth in the country, while in January this year we saw the first increase in monthly wage increase in almost two years, there is a much more concerning trend in place in the long run. Haruhiko Kuroda: Toward overcoming deflation

More price pressure news are in the works, according to the employment conditions component of the central bank’s Tankan survey, which revealed that an increasing number of companies are aware that there is a labor shortage. The tightening of the labor market is indeed finally starting to affect the wages that Japanese workers earn, however it is too early to say whether this trend is sustainable.

Should the trend not materialise, the BoJ could bet that acting in the second half of the year could further strengthen price pressures across the economy and effectively push local savers to reawaken the Japanese yen volatility.

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