By adding vague new language to its latest policy statement, the Bank of Japan is hoping to keep unwanted sharp gains in the yen in check, without having to tap its depleted policy tool-kit or tying its hands on future monetary action.
In a statement announcing its decision to keep policy steady on Thursday, the BoJ prompted some head scratching by saying it would ‘re-examine’ economic developments at next month’s rate review.
In particular, it said ‘closer attention’ was needed to the possibility that the economy could lose momentum to hit its 2 per cent inflation target.
Some market watchers thought it could be a pre-commitment to ramp up stimulus at the BoJ’s rate meeting on October 30-31, but officials familiar with the central bank’s thinking say it may be more a case of a central bank with limited options trying to buy time.
The wording of the phrase is vague enough to allow the BoJ to hold off on easing next month, if markets remain stable and global risks do not dampen still-resilient Japanese domestic demand, they say.
‘The BoJ signalled that risks are rising and that it’s ready to act if needed. But it doesn’t have any pre-set idea on when to ease,’ one of the officials said on condition of anonymity.
BoJ policymakers instead had their eyes set on the European Central Bank and the US Federal Reserve, which both topped up monetary support this month, the officials said.
Failure to act when other central banks were easing risks triggering significant yen rises, putting further pressure on exports and cooling business sentiment.
Yen moves have always been key drivers of action for the BoJ. A former top currency diplomat, BoJ governor Haruhiko Kuroda is skilful at jawboning markets and discouraging excessive bets on yen appreciation, people who know him say.
‘The primary objective of the new phrase was to keep yen gains in check,’ said former BoJ board member Takahide Kiuchi, who is now an economist at Nomura Research Institute. ‘BoJ officials are probably relieved the yen didn’t rise too much.’
The yen rallied on Thursday after the BoJ’s decision to keep rates on hold but hovered around 108 to the dollar, well below the 100 level seen by markets as the bank’s line-in-the-sand.
But while the BoJ may have succeeded in keeping yen bulls at bay for now, it also has to prevent markets from pricing in an October easing too heavily and cornering it into action.
The BoJ wants to use its remaining ammunition wisely as years of heavy money printing has left it with few tools to fight the next recession. Many BoJ officials are also wary of the rising cost of prolonged easing, such as the strain ultra-low rates is inflicting on financial institutions’ profits.
Pushing short-term rates deeper into negative territory, which is a key option if the BoJ were to ease, remains unpopular particularly among Japan’s banking industry.
‘The BoJ doesn’t want markets to interpret the new phrase as signalling an October easing is a done deal,’ said Kazuo Momma, a former BoJ official who is now an economist at Mizuho Research Institute.
‘It will try to manage market expectations via speeches and other means of communication leading up to the October meeting.’
Kuroda will speak to business leaders in Osaka, western Japan, on Tuesday. Board members Takako Masai and Yukitoshi Funo will also speak on September 25 and October 3, respectively.
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