In addition to the suddenly escalating global trade war, overnight traders had one more thing to worry about: another central bank unwinding its QE program. This happened shortly after midnight ET, when BOJ Governor Kuroda unexpectedly announced that the Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, and that there could be policy change before the 2% inflation target is achieved, marking the first time he’s provided any clear guidance on timing for normalizing policy.
“Right now, the members of the policy board and I think that prices will move to reach 2 percent in around fiscal 2019. So it’s logical that we would be thinking about and debating exit at that time too,” he said. “I’m not saying that the negative rate of 0.1 percent and the around 0 percent aim for 10-year bond yields will never change, but it is possible. We will be discussing that at each policy meeting.”
In immediate reaction, Japanese shares fell sharply, the Nikkei sliding as much as 2.9% as the Yen surged as much as 0.5%, with the USDJPY tumbling below 106, a 15 month low, while JGB yields jumped across the curve.
“Kuroda’s comments are important because he officially acknowledged a change in policy was likely before the end of fiscal year 2019,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney. “A move sub-105 yen over the coming days wouldn’t be surprising under the current risk off/trade war concern environment”
In testimony that lasted about three hours, Kuroda seemed to try mitigating the negative market impact by saying that this doesn’t affect his “overshooting commitment,” which pledges the BOJ to continue expanding the monetary base until inflation exceeds 2 percent in a stable manner. Even with the recent easing in the pace of bond purchases by the central bank, the monetary base is still increasing at an annual pace of more than 9 percent.
By then. however, the damage had been done.
“The BOJ’s stance is that in around fiscal 2019 inflation will reach 2 percent,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “If inflation rises above 2 percent, to be honest it’s just logical to consider an exit strategy around then.”
Of course, the problem is that nobody really had, which is surprising because with the Fed already raising rates and the ECB debating normalization, Kuroda has so far snuck between the cracks, even if he has been under increasing pressure to provide details on when the BOJ may follow suit.
And while the outlook for prices and the economy have pointed for quite some time of the need to mull an eventual exit, Kuroda’s acknowledgment of this is significant.
To be sure, the market did not like it.
At least Kuroda has the economy in his side: as Bloomberg reported earlier, Friday showed movement in prices and the job market that should help the central bank. Japan’s unemployment rate fell to 2.4 percent, the lowest since 1993, while inflation in Tokyo rose more than expected in February, suggesting prices could move higher nationwide.
The only problem is that 30 years into its grand monetary experiment, Japan’s wages have still to rise (see “Over half of Japan firms do not plan base pay rise this year“) , which is a problem. Kuroda said stable 2% inflation isn’t possible without wage growth of more than 3%. Pay gains are still well below this level even as the labor market continues to tighten, and Japan’s unemployment rate just tumbled to a fresh 25 year low, an increasingly meaningless metric in the world’s oldest society where the bulk of the population is outside the labor force.
And suggesting that perhaps Kuroda has misspoken, he added that the increases in consumer prices are still quite far from the target, and went on later to say he felt cautious or negative about changing the 0 percent target for bond yields now.
Still, if nothing else, Kuroda did provide a window of action, and as ING Bank’s Rob Carnell said, when the European Central Bank begins to formally normalize its own monetary policy, it may provide a window for the BOJ to act as well.
“You don’t want to be the odd-man out in this game,” said Carnell.
Finally, in response to this surprising announcement, here is how some other analysts reacted to Kuroda’s unexpected announcement, via Bloomberg:
National Australia Bank Ltd. (Rodrigo Catril, currency strategist)
- “Kuroda’s comments are important because he officially acknowledged a change in policy was likely before the end of FY2019. Technically, however this shouldn’t come as a surprise as core inflation is expected to reach 2.3% by then”
- “Still, markets shoot first and ask questions later, so yen appreciation remains the path of least resistance near term”
- “Technically dollar-yen has a lot of room to move lower and the current risk-off environment supports a stronger yen. A move sub 105 yen over the coming days wouldn’t be surprising under the current risk off/trade war concern environment”
Mitsubishi UFJ Morgan Stanley Securities (Daisaku Ueno, chief currency strategist)
- BOJ Governor Kuroda’s comments will add further downward pressure on USD/JPY, which could lead it to push toward 105 in the near term
- Sentiment toward USD/JPY has already been weighed by concerns over U.S. protectionism. Yen-buying also tend to be strong around this time of the year
- Unclear why Kuroda made specific comments about monetary exit when downward pressure on USD/JPY was already in place. May need to closely watch what Kuroda says after the BOJ policy meeting next week
ING Bank NV (Rob Carnell, chief economist for the Asia Pacific)
- Kuroda has “done as well as you could possibly imagine with the tools he’s had. He’s used them imaginatively and aggressively. Has it worked? Not entirely. Do you blame him for that? Not really.”
- “If you set ambitious targets and miss them, but get halfway, that’s better than setting unambitious targets and missing them and not getting there”
- “Japan no longer feels like it’s flirting on the edge of a dangerous deflation cliff”
- When the European Central Bank begins to formally normalize its own monetary policy, it may provide a window for the BOJ to act as well; “You don’t want to be the odd-man out in this game”
Asymmetric Advisors Pte (Amir Anvarzadeh, strategist)
- “First timeline by Kuroda-san as BOJ’s QE looks to start tapering. We expect upward pressure on the long-end and BOJ to steepen the curve as it reduces purchases of the longest-dated paper”
- “We think this scenario bodes well for the banks and other financials”
Bank of America Merrill Lynch (Shusuke Yamada, chief Japan foreign-exchange and equity strategist)
- “Kuroda’s comments could spur speculation among some traders and investors that the BOJ may start discussing an exit strategy now in order to enter into the exit” then
- “He’s just trying to keep a policy option in the future — he could fine-tune the policy before achieving the 2% goal, or he would not do so even after reaching the goal”
- “The stock market may be wary of gains in the yen, which would make it difficult to lure purchases from foreign investors