At the June 10 Diet testimony, BOJ Governor Kuroda’s replies to one politician’s question regarding the level of the JPY real effective exchange rate (REER) surprised markets, leading to an instantaneous JPY rally in the FX market and a rise in JGB yields. The headline statement of “hard to see further JPY weakness” and “US dollar may not rise against JPY even if the Fed raises rates” led to speculation that the BOJ no longer has any intentions to carry out further easing. The presumption was intensified as it was unusual for the BOJ Governor to comment on the FX market.
Is the BOJ really not going to ease anymore, ultimately giving up on its 2% inflation target? JPY weakness is a very important source to inflate the economy, while aggregate demands have suffered from picking up even after Kuroda took control of the Banks’ board meeting and adopted the Quantitative and Qualitative Easing (QQE) program in April 2013. Besides, not many people would disagree that as the Governor points out on many occasions, strengthening inflationary expectations provides footings for jump-starting and stimulating economic activities.
At the following week’s Diet testimony, indeed, Kuroda denied such speculation that the BOJ had ruled out further easing as its policy option. His comments on the JPY REER “meant to provide the fact that JPY REER had reached to the lowest levels in its history, but did not mean to forecast nominal exchange rate of JPY nor try to guide JPY higher”. In the press conference after last weekend’s policy meeting, he furthermore clearly stated that monetary policy would not be constrained by the level of JPY, emphasizing that the BOJ’s most important policy objectives are achieving price stability and upholding the Bank’s 2% inflation target as the most crucial policy directive.
After all, further easing should not be ruled out. Rather the chances still remain high, given that the real economy has not been doing well and that attaining a 2% inflation rate by the next year is getting improbable. The Japanese economy has not seen any evidence of such that aggregate demand would pick up as much so that a 2% inflation rate would be achieved in the foreseeable future. Though it was mostly attributed to inventory build-up, Q1 GDP was strong, growing by 1.0% QoQ, but the recent data prints point to negative GDP growth in Q2. By this October, when the BOJ provides its semi-annual economic report, the Bank will be forced to massively downgrade its FY15 forecasts of GDP growth (2.0%) and the inflation rate (0.8%). If this is the case, further easing will be the Bank’s last resort for maintaining credibility on its inflation targeting scheme.