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Trading  | July 19, 2017

Nikkei Asian Review’s William Pesek wonders if the BoJ is about to shock the markets again as pressure is mounting on Kuroda to save Abenomics

Masaaki Shirakawa could be forgiven for some Schadenfreude. In March 2013, the then-Bank of Japan governor was shown the door by a prime minister who felt he had not eased monetary policy enough. Now his successor is starting to worry about his own job security.


Two advisors to Japan’s Prime Minister Shinzo Abe have publicly suggested that current BOJ Gov. Haruhiko Kuroda does not deserve a second term when his current one ends in March. This is odd, given that Kuroda’s shock-and-awe monetary blasts have struck many as audacious, if not excessive. After weakening the yen by 30%, cornering the bond market, and bigfooting stock bears by fueling a massive Nikkei rally is he still, somehow, thought to be underperforming?



The whisper campaign is code for: Kuroda had better try harder, and fast, to save Abenomics and achieve the BOJ’s 2% inflation target. Yen bulls might want to take cover. Recent interventions to cap bond yields are a sign that Kuroda got the message — and may be about to weaken the yen anew. That would shake up markets at a moment when U.S. President Donald Trump complains the dollar is overvalued. But the bigger question is: what good would it do?


That gets us back to the much-maligned Shirakawa. Back in 2012 and early 2013, when Abenomics was beginning, the University of Chicago economist stressed that ultra-lax monetary policies alone would not end Japan’s malaise. For one thing, deflation is a symptom of structural rigidities, not the underlying problem. For another, terrible demographics favor saving over spending. Bold deregulation, not just printing yen, is what is needed to revive Japan’s animal spirits. And Kuroda has spent the last four-plus years proving Shirakawa right.


What pleasure Shirakawa might derive from the misfortune is probably aimed more at the man who fired him — Abe — than at his BOJ successor.


Could Kuroda do more? Of course. He could monetize public debt, load up on corporate bonds, buy up huge blocks of mortgage-backed and other asset-backed IOUs. He could take local government debt onto the central bank’s balance sheet, freeing up funds for municipalities to invest and create jobs. He could offer cash directly to households via BOJ debit cards.


[ZH: remember very quietly the BoJ is being forced to taper…]



But that is the stuff of the People’s Bank of China, not a Group of Seven institution that values its credibility.


Kuroda, remember, was hired to make irrationally exuberant adventurism seem safe. Abe bet correctly that Kuroda’s gravitas as a former Finance Ministry bigwig would keep at bay bond vigilantes tempted to bid up yields. But the BOJ’s historic easing was always meant to set the stage for the main event: a structural change big bang that loosens labor markets, catalyzes innovation and empowers women. Since Tokyo has achieved little on the reform front, Abenomics is mostly just Kurodanomics.


Abe has indeed had some wins. His preliminary trade deal with the European Union would be a big down payment on pledges to open a rigid economy. Steps to modernize corporate governance practices have nudged Japan Inc. in the right direction, albeit modestly. Tokyo wants to forge ahead with the Trans-Pacific Partnership trading bloc, even after Trump has pulled out.


Yet Abe has spent four and a half years without going for more immediate growth inducers: prodding banks to lend BOJ liquidity rather than gorging on government bonds; punishing companies hoarding profits they could use to boost wages; tax holidays for startups; less bureaucratic red tape; making Japan Inc. more about merit than seniority; quotas for female executives and outside directors; curbs on excessive (and often unpaid) overtime; energy policies that create wealth in the renewables business; strategic immigration to import more innovative brains; and warmer ties with China and South Korea that boost trade. The failure to put more wins on the scoreboard was part of the reason for the pounding the Liberal Democratic Party took in recent Tokyo elections. It was the voters’ first chance to punish Abe for a spate of scandals and unpopular legislative changes and they seized the opportunity. The hope is that Abe will now get the message and accelerate Abenomics reforms. Here, the anti-Kuroda whisper campaign could be an ominous sign.


After 1,665 days focused more on constitutional changes and security issues than deflation, Abe’s political capital is not what it used to be. Tokyo is buzzing about a post-Abe era, quite a shift from a year ago when “Teflon Abe” seemed invincible. Kuroda’s job insecurity could signal Abe is once again relying on BOJ monetary easing more than structural upgrades.


That will not restore the dynamism for which Japan was once famed. New shock-and-awe moves by the BOJ may be good for a few quarters of GDP gains and some bullish headlines. But Japan is still stuck with the millennials problem that predated Kuroda’s tenure. The more than one-third of Japanese aged over 65 are not buying cars, homes, computers, designer clothing or spending wads of cash on fancy eateries and top-end travel. Neither are Japan’s twentysomethings, who have heard bubble economy tales of surging wages and impulse shopping, but never experienced it.


The China effect, meanwhile, means that after nearly 20 years of deflation, high prices in Japan are still a threat to competitiveness. A risk no one discusses: a return to inflation without steady wage gains may damage consumer and business confidence more than it increases Japan’s attractiveness as an investment destination.


The answer is a supply-side assault on the headwinds holding things back. It is hard for anyone to find pleasure in where Japan is today — even those, like Shirakawa, who saw this coming.

However, not everyone is expecting ‘turmoil’ tonight:

Goldman: We expect the BOJ to maintain current monetary policy at its July 19-20 monetary policy meeting. On July 7, the BOJ offered to buy an unlimited amount of JGBs, thus keeping the 10-year rate at 0.1% or lower. We see this as a strong signal from the BOJ that it intends to continue a wait-and-see approach, sitting tight until US rates rise significantly. We also think the BOJ is highly likely to lower its inflation outlook for FY2017 in the quarterly Outlook for Economic Activity and Prices.

HSBC: Recently, the BoJ has said it would buy an unlimited amount of bonds, in an effort to cap the domestic interest rates. With this announcement, the BoJ reaffirmed its accommodative stance and its commitment to the yield curve control policy. The Japanese central bank intervened in the JGB market to show its commitment to its yield curve control target of 0% on the lOy bond. The focus of policy will continue to shift towards the level of yields from the amount of purchases, as JGBs outside the BoJ continue to shrink. Therefore, the BoJ is likely to maintain its policy stance with inflation well short of the Bank’s target and little sign of acceleration.

Barclays: We expect policy to remain intact and look for revisions upward to FY17 real GDP growth forecasts and downward to core CPI inflation projections in the quarterly Outlook Report.

Daiwa: We expect the Policy Board’s current policy framework to be left unchanged. Indeed, the short-term policy rate is expected to be affirmed at -0.10%, the 10Y yield target left at ‘around zero percent’, and the commitment with respect to asset purchases also unrevised. And given the economic backdrop, the Bank’s latest Outlook Report is likely to reveal limited amendments to its economic forecasts, with a possible modest upward revision to its near-term growth forecasts and a modest downward revision to its inflation forecasts.

BAML: We expect the Bank of Japan (BoJ) to keep policy on hold at its 20 July meeting, leaving its targets for rates and risk asset purchases unchanged. We also expect the BoJ to retain the Y8Otn “guideline” for increase in its JGB holdings. The Board will release its Outlook Report and update growth and CPI forecasts. We expect it to raise its FY17 and FY18 GDP forecasts by 0.1ppt each, to 1.7% and 1.4%, respectively. Meanwhile, we thinkthe Board is likely to slash its FY17 core CPI projection to 1.0% or lower (vs its April projection of 1.4%), while also lowering its FY18 forecast to around 1.5-1.6%. The weak response of inflation to the recent growth pickup should keep the BoJ firmly on hold, in our view. Our base case is that the BoJ will keep rates on hold through Governor Kuroda’s current term, and most likely through FY18. However, renewed political volatility raises uncertainty around policy direction beyond this fiscal year.

SocGen: We expect the BoJ to stay on hold with its policy tools. The focus should however be on the outlook report, in which we expect the Bank to revise up its economic outlook, but to tone down the inflation outlook. The Bank could push back the timing for achieving the 2% inflation target again, but we do not expect it to abandon the inflation target completely.

JPMorgan: The BoJ is unlikely to move markets much on Thursday although it is expected to upgrade the economic assessment more or less. Sources on Tuesday discussed the possibility of CPI estimates being reduced. Our options desk notes that o/n implied is slightly rich ahead of the BoJ while our spot trader thinks “a break is in the cards and the risk reward is favorable so my stop is above the overnight highs at 112.30.”  

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