A Reuters story today (“Kuroda Sprang Easing Surprise to Head Off Damaging Inflation Forecast”) suggested that the move by the BOJ was a rapid and expedient effort by Governor Kuroda to prevent the markets from believing that the previous Japanese actions to “ignite” inflation had been a failure. The BOJ had been trying to target 2 percent inflation but the recent fall in oil and energy prices was placing downward pressures on inflation, calling into question previous attempts by the Japanese authorities to raise inflation expectations.
I have watched the price of crude oil in terms of YEN to keep readers abreast of the impact of a weaker currency on Japan’s attempt to jumpstart its economy. Abenomics and its “three arrows” has not had great success as of yet as structural reform of the labor market has been slow in lifting wages. Also, the weakened YEN has not been able to generate increased exports as global growth is weak and Japanese corporations off-shored production during the period of the ultra-strong yen.
The post-tsunami nuclear power plant shutdown compounded Japan’s foreign trade problem for the BOJ. High oil imports prevented Japan from generating trade surpluses as the weak yen created a massive outflow of currency to global oil producers. As the OIL/YEN chart reflects (dating back to October 2012), Japan’s oil costs declined 30% and provided Governor Kuroda with the opportunity to push the YEN lower through greater liquidity additions. What this proves to the markets is that Kuroda is ALL IN on igniting inflation and whatever the cost will be dealt with in the future. OIL/YEN is trading around 9000 yen to a barrel of crude post-BOJ meeting, well off its recent highs of more than 10,000 yen per barrel. This is an important indicator for Kuroda so we will also watch if as an indicator of when to expect possible action from the BOJ.
Also, the fact that the BOJ vote was a politically tight–5-4, with the Governor’s vote as the tie-breaker–is indicative of the discourse taking place around this very experimental policy. There is a rumor floating around that Prime Minister Abe may dissolve Parliament and call a snap election in order to get public support for his economic policies and maybe even some support for turning on some nuclear power plants. The biggest issue is the next installment of the sales tax increase, which may be another reason that Governor Kuroda moved to increase the BOJ‘s stimulus program. Many in Japan believe a further rise in the sales tax will be a drag on the economy while fiscal conservatives are afraid that failure to curb some of the budget deficit will put pressure on Japanese bonds.
The JGBs are a broken market for the BOJ buys the majority of the securities, which results in a monetization of government borrowing. Kuroda’s response is to go all in on inflation and worry about the effects later. This is the asymmetrical nature of all central bank monetary policy: Stop deflation and worry about the inflationary impact in the future. The Volcker Fed showed the economists it is must easier to stop inflation than to prevent deflation. The Kuroda-led BOJ is conducting a real-time experiment in the theoretics of monetary policy.