What’s in a word or, in this case, four words?
The Bank of Japan tweaked its language on inflation overnight in what was one of the more closely watched meetings in a while. The bank now says inflation expectations are “more or less unchanged”, as opposed to “weakening.”
That might not seem like a big deal, but it is. For one thing, this is Japan we’re talking about. If inflation expectations have stopped falling, well that’s a big step for them and if the BoJ is prepared to acknowledge that, then it would seem we have confirmation of the “rumor” that’s been swirling since January 9, when the bank trimmed 10-25Y JGB purchases stoking bets that even the poster child for monetary accommodation is set to follow in the Fed and the ECB’s footsteps in taking the first steps down the long road to normalization.
You can read the full context for today’s meeting here, but suffice to say the tweak to the inflation language confirms a Wall Street Journal story from last week and underscores the notion that the market may not be able to count on the BoJ forever when it comes to persisting in profligacy.
“With steady growth and stocks rising in Japan, people see inflation ticking up even if it doesn’t reach BOJ’s 2 percent target,” Jun Kato, a senior fund manager at Shinkin Asset Management Ltd, told Bloomberg, adding that “amid such sentiment, the change in wording on the inflation expectations was seen by FX players as a shift in tone.”
Of course the BoJ kept its easing program and its price and economic forecasts unchanged, but that was expected and indeed, anyone telling you that’s “proof” that they aren’t thinking about an exit is being obtuse. Speaking of being obtuse, obviously Kuroda was going to walk back the tweak to the inflation language in the presser because that’s what Kuroda does.
“Inflation is still distant from the 2% price target [so] the BOJ must continue its current monetary easing program,” Kuroda said during the presser, adding that “even though the economy is growing, prices remain weak.” He also insisted (again) that bond operations are dictated by operational factors and don’t imply changes to policy. In other words: don’t read too much into those ops.
But again: of course he was going to say all of that. This is how the push-pull works and if everyone hasn’t figured that out by now, well then God help you if anyone actually does turn overtly hawkish one day.
I mean sure, they kind of had to acknowledge the apparent change in inflation expectations but you can’t just write off the tweak to the language just because Kuroda talked it back several hours later. What did everyone think he was going to do? Show up and say “look, as far as I can tell we’re all set to wind this fucker down so if I were you, I’d be long yen about now”?
Here’s what USDJPY did during all of this:
As you can see, to the extent anyone was inclined to use Kuroda’s dovishness as an excuse to play for a continued reversal of yen gains, they quickly lost interest above 111.
To be fair, the BoJ did clearly say there were still substantial risks to the downside on inflation expectations which, as Goldman writes, suggests the bank’s confidence in hitting the target hasn’t really increased.
As Goldman goes on to note, “Kuroda said that the yen’s appreciation versus USD on January 9 could stem from a ripple effect from the US currency’s depreciation against a strong euro, and he questioned the direct link to the BOJ’s reduced JGB purchases.” Given that, Goldman says Kuroda “appears keenly intent on suppressing excessive market expectations of an early rate hike to avoid inviting premature yen appreciation, which could dampen inflation in the future.”
Right. And see that’s what I’m saying. You are of course free to draw your own conclusions here, but this is the same game policymakers have been playing for years. They tip their hand and then immediately fine tune the messaging.
Oh, and if you were wondering whether Kuroda was thinking about any changes to the ETF program, the answer is “no”.
He also said that as far as he can tell, there’s “no excessive bullish expectations in the stock market.”
The Nikkei and the Topix both rose more than 1% on Tuesday to new 26-year highs…