The BOJ revelling in obstinate isolation

For a guy who professes to be uncomfortable with extreme moves in currency markets, Haruhiko Kuroda certainly doesn’t seem to mind causing them. By doubling down on easy money, the Bank of Japan governor is set on a path that will only further isolate the country from its peers and almost guarantee further erosion in the value of the yen.
After a week of high drama in the normally staid world of monetary policy, the BOJ stands out for keeping its main settings unchanged: In its meeting, the bank left its benchmark interest rate in negative territory, while yields on 10-year bonds will remain capped at around zero. The only noticeable shift in its statement was to note that market developments warrant “due attention.” Traders took the lack of something more robust as a cue to aggressively sell the yen, adding to a slide of 14% against the dollar this year, the most of any major currency.
Chances that the BOJ would alter course this week were always slim, given that Kuroda and top lieutenants had emphasized their commitment to stimulus. But given the tumult of recent days — significant tightening in the US, the promise of more in the UK, and a scramble in the euro zone to shore up bonds — some modification in the BOJ’s stance couldn’t be ruled out. Japanese officials have been sounding uneasy with the extent of the yen’s decline.
Yet the chief perpetrator of yen softness doesn’t appear to have much appetite to change direction. The underlying driver of the currency’s drop is the yawning gap between Kuroda’s insistence on extreme easing and escalating borrowing costs elsewhere. It’s not like inflation hasn’t visited Japan; the pace of price increases has finally crossed the 2% target. Kuroda, however, wants to see evidence it can stay there on a sustained basis before approaching liftoff.
It’s not like Kuroda lacks the tools to signal a gentle change might be coming. The BOJ could have amended its forward guidance, which pledges to ease policy further if required. The governor seemed to take this possibility off the table in a speech at Columbia University in New York two months ago, saying that the economy isn’t vulnerable enough to warrant it. So why keep the option to pump more money alive?
Kuroda probably thinks that any change, however seemingly benign, will be seen as a prelude to a rate hike. He may not be wrong. With foreign traders once again taking up the “widow-maker” trade of shorting government bonds in the expectation that the BOJ will bend, any minor tweak would be blood in the water.
Kuroda will know that one reason pressure is building on the BOJ to act is the expectation that it will — a self-fulfilling prophecy. He has been at pains to try and downplay these expectations in recent months, and Friday’s statement again noted how the bank expects core CPI to stall at 2% and then decline — hardly a reason to shift policy. But, then again, Kuroda is known for surprises — and now he must convince the world to believe him when he says policy won’t budge this time.