One of the reasons why the USDJPY tumbled overnight is because of a set of comments by one of the most hawkish BOJ board members, Takehiro Sato, expressed pessimism about the economy and the central bank’s strategy, saying in a speech Thursday that the BOJ won’t be able to reach its 2% inflation target as forecast and negative rates won’t work to boost investment. “I believe that it is desirable to aim to achieve the price stability target of 2% as a medium-to long-term goal and I expect that the road toward this goal will be long,” Takehiro Sato, one of nine BOJ board members, said in a speech in Kushiro, Hokkaido on Thursday.
This was immediately taken by the market as yet another confirmation that Abenomics will be stretched out, and that the probability for a substantial near-term easing by the BOJ has been notably delayed, leading to the steep drop in the USDJPY observed overnight. To be sure, Sato is a known hawk and dissented on the January decision to adopt a negative-rate policy and also in October 2014, when the BOJ expanded stimulus. That does not make him wrong.
“I believe that the challenge from now on is reforming the policy framework, which is intended to provide solutions in the short term, so as to adapt it to a long-term initiative,” he said Thursday. “The first thing the bank should do for that purpose would be to make the asset purchase operation more flexible.”
As Bloomberg notes, Sato’s concerns about reaching the 2 percent price target as forecast echo those of some investors as Governor Haruhiko Kuroda continues to buy bonds at a record pace and keeps expanding stimulus, yet inflation hovers near zero. Former Deputy Governor Kazumasa Iwata, who served on the board 2003-2008, has predicted that the BOJ will hit the wall in terms of asset purchases by the middle of 2017. “There are growing concerns about the sustainability of the BOJ’s easing,’’ said Daisuke Karakama, chief market economist in Tokyo at Mizuho Bank, a unit of the country’s third-biggest lender. “We can’t see when the BOJ is going to meet the price target and if you take Kuroda’s words at face value, he will have to keep adding stimulus.”
What is more remarkable, was Sato’s admission that instead of easing conditions, the BOJ is in fact tightening them: “I believe that the negative interest rate policy has the effect of monetary tightening, rather than an effect of easing. In addition, the negative interest rate policy could affect financial system stability.” He cited risks from a negative-rate policy adopted in January because it clashes with the expansion of monetary base target.
Perhaps Kuroda should have thought of that back in January.
Sato continues: “I expect that its growth is highly likely to remain sluggish in the future while being susceptible to developments in the global financial markets and overseas economies”
He then bashed QE: “From financial institutions’ recent move to purchase super-long-term bonds in pursuit of tiny positive yield, I detect a vulnerability similar to that seen before the so-called VaR shock in 2003” when Japan’s bond yields surged in the short term, Sato said. The BOJ has to buy about 120 trillion yen of bonds this year as some bonds mature, which is more than 90 percent of newly issued bonds in Japan’s market. The BOJ held 32 percent of government bonds at the end of December, according to the bank.
In other words, as we predicted in late 2014, the BOJ is now monetizing virtually all gross issuance, and is why Japan is scrambling to find an excuse to issue more debt.
But the punchline was the following: “Japan’s economy, with its potential growth rate of nearly 0%, is so fragile as to be liable to post negative growth even because of trivial external factors such as weather conditions.”
But of course we already knew that: recall that the US’ own BEA applied a second seasonal adjustment to last year’s Q1 GDP data to smooth out the “weather impact.” Which, however suggests that the US economy is just as bad as that of Japan, one where the weather alone can push the economy into a recession. At least Japan has not yet figured out that there is a seasonal adjustment for that.
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