Out Of Rabbits, A Paralyzed Bank Of Japan Sits Idly By

The Bank of Japan did what they could do on Tuesday – which was nothing.

Despite a souring outlook for the global economy and against expectations for imminent rate cuts from the Fed (this week) and the ECB (in September), the BoJ kept policy unchanged at its July meeting.

Although governor Kuroda will always suggest there are more tools in the toolbox (more rabbits in the hat), the bottom line is that to the extent monetary policy has limits, those limits are being pushed in Japan. That means whatever ammo is left will be guarded jealously and only deployed if absolutely necessary.

In the simplest possible terms, it’s not clear that USDJPY at a 108 handle qualifies as an emergency. “The current [exchange rate] suggests there is little urgent need for policy changes at this juncture”, Goldman wrote Sunday.

“[The BoJ] may have decided to refrain from changing policy as the impact of revising its forward guidance would be limited, and it may have decided to store up possible stimulus for future use”, Minori Uchida, head of global market research at MUFG Bank in Tokyo, said.

Still, the yen’s knee-jerk gain to Tuesday’s can-kick underscored the risk of doing nothing while the Fed and the ECB pivot. That the BoJ didn’t have the luxury of seeing how dovish (or not) the Fed will be complicated things further. In predicting the BoJ’s decision to stand pat, Goldman noted “significant uncertainties about the depth of a potential Fed cut, the Fed’s stance on future rate cuts, and possible market reactions to both, especially given the BOJ’s limited options for additional easing”.

The BoJ once again slashed its inflation outlook. The growth forecasts were cut as well. On the inflation front, 2% is now a pipe dream.

It’s possible that easing by the Fed and the ECB will help allay fears about the global economy, boosting risk appetite and weakening the yen in the process. In other words, the BoJ likely hopes that any yen appreciation that might be expected to occur as a result of the bank taking a wait-and-see approach even as its two “Big 3” counterparts cut rates, will be offset by the risk-on mood which should accompany a renewed commitment to accommodation from Jerome Powell and Mario Draghi.

That’s a risky gamble, though. If the Fed puts an overtly dovish spin on the expected 25bp cut this week (or if the FOMC surprises and cuts by 50bps), the dollar could slide and the yen could strengthen. It’s also possible that the Fed disappoints markets with a hawkish surprise and any subsequent risk-off behavior boosts the yen even as the dollar holds up.

This all comes at a time when the Trump administration is actively considering outright FX intervention to bring down the greenback. Needless to say, the last thing Japan needs right now is a disinflationary shock from competitive devaluation orchestrated by Steve Mnuchin’s Treasury. Irrespective of whether any such unilateral intervention effort by the US would be successful, the signaling effect could be highly disruptive.

Earlier Tuesday, industrial production data out of Japan came in well below estimates, perhaps highlighting the need for more stimulus. “While [the] outlook for policy rates in the US and Europe is already largely factored into the market, expectations for a rate cut in Japan are rather limited due in part to concern about negative side effects”, Barclays wrote last week.

Still, economists expect the next move from the bank to be easing in one form or another.

If there are any more rabbits in Kuroda’s hat, he’ll almost surely be called upon to pull them out sooner or later – especially if the outlook worsens and his counterparts in the US and Europe get more aggressive in their own efforts to head off a downturn with rate cuts and additional stimulus.


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