© Kumiko Ishikawa
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Ahead of the BoJ policy meeting, everyone was expecting a quantitative easing program with various components, but it was decided to do nothing. Haruhiko Kuroda stated he has various options open for the Japanese economy turnaround, however, several questions have been raised: is this lack of action evidence that Japan has run out of options? Is Kuroda waiting for government action or is the BoJ waiting for Fed action to push the Dollar down? What is your opinion on the matter?
The most effective option for the Japanese economy is the suspending the consumption tax increase (scheduled for April, 2017). But the government must make significant preparations in order not to damage Japan's credit before they decide to do that. That means that BOJ Governor Kuroda needs to gain time for the Japanese government. Kuroda often says: "We would not hesitate to take further easing measures if necessary to achieve the 2% inflation target at the earliest possible time." - He iss buying time with these words.
The Fed wants increase interest rates, which will push the Dollar higher. But for the time being, Fed is trying not to make the greenback tick up by showing a cautious attitude. If Fed wants the market to anticipate a rate hike in June, the pressure for the Dollar to appreciate will rise. In that case, the Japanese Yen will also decline relatively. Kuroda wants to wait for the best scenario.
Japan is currently suffering from deflation and decline in real GDP. At the same time the unemployment rate is low, per capita income is high as well as the living standard therefore it is hard to tell whether Japan is doing extremely well or it is struggling. How would you assess Japan's current performance and what do you think will happen to Japan in the future, based on their current policies?
Japanese standard of living and the unemployment rate are not bad as compared with other countries. But long term deflation is robbing Japan of vitality. Pulling out of that is not easy. "Abenomics" relied on monetary policy but the consumption tax hike in 2014 knocked out the BOJ's achievements and was a big failure. What BOJ can do now is limited, so the Japanese government needs to draw up new actions as soon as possible. Suspending the consumption tax increase in 2017 will give the government one chance to do that. Otherwise, Japan will just be forced to wait for the world economy to recover.
The Yen has gained strength recently. What will be the main drivers that will determine the future performance of the Yen?
The steep rise of the Japanese Yen recently has been caused by speculators who think that the Japan's ministry of finance would not able to do a currency intervention. Although we have sometimes seen the JPY rewind after by verbal intervention by the finance ministry, the possibility of a JPY jump is still left. If that happens, the main JPY buyer will be speculators again.
If Japan's finance ministry decides to intervene by selling JPY, speculative action would calm down for a while. But the finance ministry needs two criteria to justify intervention: the level of the JPY and the speed of the appreciation. When the BOJ announced it was leaving monetary policy unchanged on 28th April, the USD/JPY declined about ¥4. If the USD/JPY fell sharply - over ¥5 for a day and break 103.00(floor of profitable rates for business), that might be enough for the finance ministry to intervene.
What are your forecasts for USD/JPY, AUD/JPY and EUR/JPY by the end of 2016?
There is a high risk of USD/JPY could fall sharply in the short-term, including the possibility the pair breaks ¥100 temporarily. But as long as the Fed shows it is willing to raise interest rate twice in 2016, we will see the USD/JPY go up. If the Fed decides to raise rates three times, the USD/JPY may rise over ¥120.
There is high possibility that the RBA cuts interest rates in near future. So there is currently downward pressure on the AUD. There is also a risk the JPY could also jump in the short-term, so I think the AUD/JPY will be under downward pressure for a while. But after cutting rates, the RBA tends to keep monetary policy unchanged for a few months or more recently. Unless the Australian economy is hit by further crisis, RBA may not cut rates again in 2016. Stable oil prices will also help. In addition, Japan will need to ease monetary policy which strengthens JPY-selling pressure. Therefore, the AUD/JPY will recover toward the end of 2016.
The ECB and the BOJ are almost in the same situation. Both of them are easing and have fewer and fewer options for how to increase that easing. Although the EUR/JPY declined because of the slump in oil prices and speculative JPY-buying, etc at the 1st