Pressure on Bank of Japan’s Kuroda Escalates

Market Trends - 25/07/2016

With an upcoming interest rate decision and monetary policy statement due on Friday from the Bank of Japan, the pressure on Governor Haruhiko Kuroda to act continues to intensify, especially in light of the Japanese Yen’s rapid appreciation over the last few months. According to recent remarks, officials within Japanese Prime Minister’s government believe that the existing quantitative and qualitative easing program should be expanded from the current JPY 80 trillion to JPY 90 trillion in conjunction with the release of government stimulus. The belief behind this move is that coordinated action will be significantly more effective in fighting the recent Yen gains while helping offset the wave of deflation that has gripped Japan over the past few months. With consumer prices remaining in negative territory on an annualized basis for the last three months, the absence of drastic action from either the Government or Central Bank could see this deflationary spiral worsen over the coming months. However, as the trade figures released overnight display, economic conditions are worsening rapidly, necessitating prompt action.

The plunge in both exports and imports underlines the challenges facing policymakers as they attempt to restore stronger growth and inflation to the economy. Although Prime Minister Shinzo Abe has promised more aggressive actions to help spur higher wages and stronger spending, including the postponement of the proposed sales tax increase, the results have been minimal when taken in context. The Yen has managed to retreat significantly from multi-year highs after USDJPY briefly fell beneath the critical 100.00 psychological level following the “Brexit” decision. Stimulus speculation has boosted optimism that the government will act to loosen financial conditions further, helping the Yen ease from recent strength. However, another round of global risk aversion could quickly reverse the ongoing depreciation, seeing the USDJPY pair once more retest the 100.00 level. Furthermore, should the upcoming decisions on government stimulus and monetary policy disappoint financial markets, the stage is set for another significant decline in USDJPY. With pressure to act already sky high, Kuroda’s burden will only grow over time.

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