The BOJ doubles down on a weakening yen

Any doubt that the Bank of Japan is comfortable with a weak yen should now be eliminated. The central bank is effectively doubling down on the trademark super-easy monetary stance it began developing decades ago — just as the Federal Reserve and its peers become more aggressive in raising rates.
In a statement after its policy meeting, the BOJ defended its efforts to keep the yield on 10-year government bonds near zero, and said it will buy a limitless amount of debt at fixed rates every business day to hold the line. The bank kept its guidance that rates will stay low or go south, despite Governor Haruhiko Kuroda flagging a possible change to this stance in a speech. Anyone looking for even a hint that Japan was prepared to crab-walk away from emergency settings would have been sorely disappointed. Traders, justifiably, hammered the yen.
The primary driver of the currency’s retreat in recent weeks has been the widening gap in borrowing costs between Japan and the US, where the Fed is expected to become more assertive in its fight against inflation. Markets anticipate Chair Jerome Powell will lift the benchmark rate by 50 basis points next week and signal heightened alarm about rising prices.
The implication of the BOJ’s latest measures is that Kuroda is not only comfortable with the yen adding to its 11% slide against the dollar this year, but is welcoming it as a way to achieve his long-elusive 2% inflation target. Hitting that goal has become his No. 1 priority in his final year at the helm, closely followed by nursing the economy to full health after on-again/off-again contractions the past few years. (It’s important to remember that, even if inflation is picking up in Japan, it’s nowhere close to levels seen the US. In fresh projections, the BOJ sees the gauge hitting 1.9% this year before retreating to 1.1% in 2023.)
Kuroda has indicated previously that Japan’s current rising prices, triggered not by higher paychecks or demand but by input costs, is “bad” inflation — not the type the BOJ desires. Without solid wage gains, Kuroda finds it tough to see inflation staying around its target in any sustainable manner. However, there were indications Thursday that even bad inflation could be good. The bank’s outlook talks about how rising prices might lead to a change in medium- and long-term expectations, and thereafter lift wages. In other words, the trend just might break the 30-year deflationary mindset that hangs over the country, and trigger the virtuous cycle of rising wages and prices Kuroda has tried to generate for nearly a decade.
The bank had warned as recently as January that it feared companies would squeeze margins rather than lift prices in the face of rising energy and import costs. While a certain amount of that has happened, prices are nonetheless rising for everything from beer to soy sauce. That’s helped acclimate consumers, who haven’t seen increases for a generation. The challenge officials face is that shoppers will have to go through a lot of pain at the checkout before wages rise. Prime Minister Fumio Kishida, who prides himself on being a “good listener,” is likely to hear a lot of complaints from voters. And let’s not forget the sizable proportion of the aging Japanese population on pensions, for whom wage rises are moot and rising prices only a pain. Is there really no hope for Japan’s interest-rate hawks? Kuroda has a history of surprising, and he may still have some tricks left.

—Bloomberg