Yen gain seen foiling BoJ chief’s hope of inflation rebound
December 11 2015 07:02 PM

Japanese yen notes are arranged for a photograph in Tokyo. Japan’s currency has gained against all of its 31 major peers in the past six months, with banks including JPMorgan Chase & Co and Morgan Stanley predicting it will also outperform in 2016.


Bank of Japan (BoJ) Governor Haruhiko Kuroda says inflation will rebound toward his 2% inflation target next year once the effect of lower oil prices fades from the equation. Looking at the yen suggests otherwise.
While a BoJ gauge that strips out energy costs is rising at the fastest pace in data to 2011, the central bank’s trade- weighted yen index has rebounded 5.5% in 2015, threatening to end a period in which depreciation boosted import prices. Japan’s currency has gained against all of its 31 major peers in the past six months, with banks including JPMorgan Chase & Co and Morgan Stanley predicting it will also outperform in 2016.
The potential for a change in the trends of oil and the yen to cancel each other out calls into question Kuroda’s confidence that he can reach his inflation goal by around March 2017 - a proposition already doubted by the vast majority of economists polled by Bloomberg. Credit Suisse Group and Mitsubishi UFJ Kokusai Asset Management are among those who say he will be forced to make a difficult choice between expanding easing or scaling back the BoJ’s price target.
“The positive effects on food inflation from a weaker yen seem to already be fully in the price,” said Hiromichi Shirakawa, the chief Japan economist at Credit Suisse in Tokyo and a former BoJ official. “The central bank seems to be taking a longer-term view for seeing the effects of a weaker yen than the market, which thinks the benefits are peaking. If the market is correct, even if pressure from cheaper energy disappears, inflation will get stuck around 1%.”
The BoJ’s gauge of the nominal effective yen exchange rate is on course for its first annual advance since 2011, and rose to a 10-month high in September. Compared with that month, more than twice as many analysts now expect the yen to climb to 120 per dollar or stronger by the end of 2016, forecasts compiled by Bloomberg show, as speculation mounted that the BoJ is done expanding stimulus and the US Federal Reserve with raise interest rates only slowly. The yen traded at 122.04 in Tokyo.
An index of import prices fell 17.4% in November from a year earlier, the fastest pace in more than six years, data released Thursday by the BoJ showed. It has declined every month this year. The yen has strengthened 5.3% against China’s yuan in the past six months. Japan imports more from China than any other country, according to Ministry of Finance data.
“Massive year-on-year depreciation of the yen began from August last year, so the benefits to inflation that we saw were only until this August - and while they won’t disappear overnight, they will probably be gone around May of next year,” said Masaaki Kanno, the chief economist in Tokyo at JPMorgan Securities, who has also worked at the central bank. “The BoJ will be forced into additional easing in the second half of next year amid falling stock prices and a strengthening yen.”
Japanese stock values have almost doubled in the three years since Shinzo Abe became prime minister on a pledge to stem more than a decade of deflation. The currency has weakened by about a third against the dollar in that time, while bond yields dropped to record lows. The 10-year Japanese government bond yielded 0.315% yesterday.
Kuroda has continued to express confidence that monetary policy is having the intended effects and that inflation will reach his target, even as he and his board have extended their deadline twice. The governor has pointed to a BoJ gauge that strips out both energy and fresh food, which rose 1.2% for a second month in October.
“With the underlying trend in inflation steadily rising and the effects of the decline in crude oil prices dissipating, the rate of increase is expected to accelerate toward 2%,” he said in a speech on November 30. “Although the timing of when inflation of around 2% is reached depends on developments in crude oil prices, the Bank projects this to be around the second half of fiscal 2016,” which ends in March 2017.
What has been good for inflation hasn’t always been good for the overall economy. Yen weakness has squeezed consumers and spurred increasing bankruptcies among smaller businesses, even as it swelled profits at Japan Inc’s big exporters to records.
Mitsubishi UFJ Kokusai Asset Management cites that as the reason the BoJ won’t boost stimulus again, opting to scale back its inflation expectations instead. Even in that eventuality, the fund manager expects yields to remain low amid continued central bank asset purchases.
“Instead of trying to force prices to the inflation goal, finding a comfortable level of inflation would probably be accepted,” said Masayuki Koguchi, Mitsubishi UFJ Kokusai’s chief yen-bond fund manager. “We may be far from 2%, but we are certainly emerging from deflation.”

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