If You’re Long Risk Assets, You Do Not Want To Hear Kuroda Using The Word ‘Exit’

For two months now, the world has been eyeing the BoJ closely for signs they might be set to follow the Fed and the ECB down the road to policy normalization.

To be sure, Japan is a long way from their inflation target, but as Albert Edwards wrote in January, the deflationary mindset seems to be breaking. Vanquishing the deflationary mindset has the potential to become a self-fulfilling prophecy by pulling forward consumer spending. Maybe Kuroda’s “think happy thoughts” approach wasn’t so stupid after all.

Speculation about a BoJ exit has been fueled lately by the bank’s decision to cut 10-25Y JGB purchases back in early January. That triggered a violent FX reaction. As BofAML reminded everyone later in the month, the BoJ has reduced its JGB purchases under YCC. “Purchases of long-term JGBs were ¥80tn in 2015 and ¥79tn in 2016, but declined to only ¥58tn in 2017,” the bank wrote, in a piece dated January 19. This trend is likely to continue.


Still, the FX move showed just how sensitive the market is to any sign from Kuroda that the BoJ is set to take even the first steps down the road to rolling back accommodation and some media reports have suggested the bank is indeed feeling better about its ever-elusive inflation target. Recall this from a WSJ piece out in January:

The Bank of Japan is optimistic about hitting its 2% inflation target within two years and is considering how best to communicate any possible policy changes, say people familiar with its thinking.

As the central bank prepares for its first policy meeting of 2018 on Monday and Tuesday, insiders see more signs that inflation is on the right track. Core inflation–all prices excluding fresh food–rose 0.9% in November, and corporate leaders have expressed openness toward larger wage increases this spring, when annual talks with labor unions take place.

Earlier this week, the bank cut purchases of super long bonds, raising still more questions about the future of monetary policy even as the move was pretty clearly an attempt to engineer a steeper curve. “The Bank of Japan’s cut in purchase of bonds maturing in over 25 years is probably in response to a recent drop in super-long yields, which were pushed lower by seasonal demand from investors,” Daiwa’s Keiko Onogi said on Wednesday.

Well fast forward to Friday and we got this during Kuroda’s confirmation hearing for reappointment to another term:


The reaction was immediate in FX and USDJPY was probably already inclined to keep falling due to risk-off sentiment around the trade banter. “Kuroda unwittingly filled bids for real-money funds below 106 yen per dollar”, one Asia based FX trader told Bloomberg.  “[These] comments on policy exit will add further downward pressure on USD/JPY, which could lead it to push toward 105 in the near term,” Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo added.


JGBs were were roiled:


“His comments leave a sense of abruptness and are inconsistent with what he had been saying before” Naoya Oshikubo, a rates strategist at Barclays remarked, adding that unfortunately, JGBs “had been bought in the morning before Kuroda’s surprise comments that were opposite to what he had been saying recently spooked the market.”

To be clear, the Nikkei was already sharply lower, so no, those comments didn’t sink stocks in Japan by themselves (stocks in Japan were already sunk, taking their lead from the horrific U.S. session). But it didn’t help there at the end:


Obviously, the market overreacted here so you can expect a concerted push to walk this back. I mean, they’ve been saying 2019 is the date for hitting the inflation target so it makes sense that that would also be the date for stimulus unwind. Still, markets will be markets and if there’s anything we didn’t need at a time when investors are already spooked, it’s a “hawkish” Kuroda.

In the near-term, this is another to reason to sell risk. Plain and simple.



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