3 Reasons Why The BoJ May Ease Within 2 Days

Tyler Durden's picture

Tomorrow will bring the end of a two-day policy meeting at the Bank of Japan which SocGen expects will result in the announcement of additional easing measures. Whether medium-term macro-economic issues or short-term risk tolerance fading weighs heavier on their minds as their efforts from the previous easing announced on Feb 14 are rapidly losing their effectiveness - especially evident in their recent inability to restrain JPY appreciation (which notably JPM believes will continue on the back of a disconnect between Commitment of Traders positioning and the JPY carry divergence - via Bloomberg's chart-of-the-day). Critically the exchange rate is a cornerstone of BoJ policy and while risk-off will drive JPY appreciation via carry unwinds (in a purely technical world) the political, currency, and economic factors that SocGen lays out suggests strongly that the BoJ (under increasing attack from politicians for its failure to reflate the economy) will bring out yet another bazooka to show its worth - and prove this time is different even as we noted here with inflationary concerns rising. Lastly, will JPY lose its carry-trade attractiveness and implicitly its impact on US equities even if they do ease dramatically or when will the market/politicians lose patience with a drip-drip-drip approach and side with China's view of a rising devaluation risk as we noted here recently.


via Bloomberg

Societe Generale: Further Easing Likely

We have previously predicted that the BoJ would maintain a wait-and-see stance for the time being. However, we now expect the Monetary Policy Meeting scheduled for April 9-10 to result in additional easing measures. There are three reasons why Japan’s central bank will opt to implement monetary easing measures next week.

1) Political factors:

The BoJ reform proposal revealed by the Liberal Democratic Party (LDP), Japan’s leading opposition party, will push Prime Minister Noda into a difficult position. Under the proposed reform, the BoJ will be required to end deflation with a specific time limit, and the government may dismiss BoJ executives when the central bank fail to meet its objective. This would naturally be unacceptable for the BoJ. But unless the BoJ adopts a clear stance as a deflation fighter, Mr. Noda will find it difficult to oppose the LDP’s reform bill. Many Diet members within the Democratic Party of Japan (DPJ) also appear to support the aims of the reform bill, and Mr. Noda will want to avoid any proliferation of issues that could divide the party. In this sense, both the BoJ and the Noda cabinet would benefit considerably if the central bank decides to implement monetary easing measures at this time and to maintain its deflation fighter stance.

2) Currency factors:

Since 2009, the BoJ has focused on the exchange rate as its channel for influencing the real economy through monetary policies. All of the key shifts in the BoJ’s monetary policy over the past few years, including the introduction of 3-month fixed-rate operations with a price stability goal centering on 1% in December 2009, the establishment of the Asset Purchase Program in October 2010, and more recently the adoption of an inflation goal in February 2012, have been targeted toward the reversal of expectations of a higher yen. The easing of monetary policy in February 2012 triggered a shift in the trend toward a higher yen, but the effects appear to have waned in recent weeks. The BoJ can stave off the emergence of high yen expectations by indicating that it cannot rule out additional easing measures.

3) Economic factors:

In 2012, the Japanese economy is expected to achieve high growth thanks to the stimulatory effect of reconstruction demand. We are predicting 2.4% growth in this calendar year and 2.6% in the fiscal year ending March 2013. However, reconstruction demand will start to fade in 2013 and beyond, and the economy will also come under considerable downward pressure from the consumption tax increase in 2014. Japan needs to ensure that the baton is passed smoothly from reconstruction demand to other sources of demand, especially capital investment and consumer spending. BoJ could help ensure such transition through holding down the expected real interest rate with the combination of keeping its virtually zero nominal interest rate and higher inflation expectation. Since it takes between six months and year for the effects of monetary easing to permeate through to the real economy, it is appropriate to implement easing measures now in anticipation of an economic slowdown in 2013.

Specific easing measures

What measures would be appropriate if the BoJ decides to implement monetary easing measures on April 10?

Raising the inflation goal to 2%?...

As indicated in the minutes for February 14, the BoJ appears to be considering an increase in the inflation goal from 1% to “a positive range of 2% or lower.” Lifting the inflation goal posts to 2% would certainly strengthen the effectiveness of the policy interest rate along the time axis. We believe that the inflation goal should be moved to 2% in the medium/long-term perspective. However, Japan’s CPI remained at the low end of the 1% range even during the bubble era of the early 1990s, while the average for the period since 1980 is just 0.5%. It would be necessary to think carefully about whether a CPI rate of increase in the high end of the 1% range would be appropriate for Japan. Furthermore, trends in the OIS market already suggest that the rate is unlikely to rise for about five years, which means that there would be little benefit in terms of strengthening the time axis.

An increase in the Purchase Program…

An increase in the Purchase Program, especially for government bonds, seems an appropriate way for the BoJ of ease monetary policy at this stage. If purchases are increased by around ¥5 trillion, it would be necessary to expand the scope of purchasing, which is currently limited to bonds up to two years, to include bonds up to five years. However, we do not believe that the BoJ needs to specify this next week. The announcement of an increase in the Purchase Program would be sufficiently effective in its own right. The prices of risk assets, such as stocks, purchases of which have not increased recently, are now higher than previously. It would not be inappropriate to include a certain amount of these assets in the scope of purchasing as a way of emphasizing the BoJ’s stance as an inflation fighter.

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LawsofPhysics's picture

Carry trade. thanks.

GetZeeGold's picture





What the hell....everything else is radioactive over there.


achmachat's picture

So the race to the bottom is still on?
Can somebody who says cash is king please explain his or her reasoning to us??

GetZeeGold's picture



.....we'll get back to you on that.


SheepDog-One's picture

Ooo! Anoher currency is goin all wobbly again....better print moar of it!

francis_sawyer's picture

I still have checks so I can't be out of money...

Sudden Debt's picture

Got to keep the stove burning with banknotes now that they're out of nuclear power.
Burn baby burn!

mayhem_korner's picture



Big jump in YenFest 2012 tee-shirt futures today...

ziggy59's picture

(Ink is still hot item) Japan, China agree to give IMF boost

Bicycle Repairman's picture

Can central bank printing overcome radiation and evacuation?  Can Superman beat Godzilla?  So many questions.

Dr. Engali's picture

Godzilla , the king of all monsters, can easily be taken out by Superman. But you can't get to the tootsie roll center of a tootsie pop with two licks.

Dr. Engali's picture

High growth due to the " stimulus " of reconstruction. .... You mean all we need is a few tsunamis more nuclear meltdowns and the economy is fixed? Frikken idiots.

SheepDog-One's picture

Cant get 'growth' to appear? Tear it all down and rebuild it then!

Dr. Engali's picture

Sounds good. Let's tear down Detroit and start over. That should be stimulative.

scatterbrains's picture

I say they don't yet... delay it anyway while they work with our Fed to take down the paper energy markets into the summer. Everything will come off as the liquidity is pulled and margins are jacked.. probably followed by a huge snap back off the lows while they then concentrate on suppressing/discouraging paper energy prices from joining the party which I doubt will work for long anyway.

Frozen IcQb's picture

Like the US and the UK, Japan’s economy is heading of the cliff. Their population is aging rapidly and both their private pensions and social security benefits are mostly un-funded. Savings are declining. Japan has very little energy and natural resources. Commodities are imported. This was not a problem while Japan was running a massive trade surplus. The GDP was supported by exports and a cheap yen supported an economy of exporters. The BOJ intervened constantly to maintain a cheap currency. As a result, they have accumulated huge FX reserves of which 1,000 billion is denominated in USD and parked in US treasuries.

Here’s the game changer: The global economy is slowing. Japanese manufacturing jobs are moving to other Asian countries. Japan needs energy and commodities to rebuild its infrastructure. 30% of their electricity generating capacity has vanished because all their nuclear power generators are now offline. Energy imports have soared. They are now running a trade deficit with the US and China that will likely continue. This trade deficit will force a change from a weak Yen to a strong currency policy to facilitate their infrastructure reconstruction through cheaper imported material and energy. Their debt to GDP is over 200% and that’s excluding the unfunded liabilities. They need money and printing is no longer to their advantage because it makes imports more expensive. The incentive for a weak currency is no longer there. Consequently, I believe they will repatriate some of their USD FX reserve made possible by selling USD assets. Selling US assets and dollars for yens will exert downward pressure on the USD/JPY pair. A rapid unwinding of the Japanese carry trade will follow. US import prices will escalate as a result to the detriment of over-leveraged and unemployed American consumers.

This could most likely be the single largest threat facing the US economy in 2012-13.

Jack Sheet's picture

"...In 2012, the Japanese economy is expected to achieve high growth thanks to the stimulatory effect of reconstruction demand. We are predicting 2.4% growth in this calendar year and 2.6% in the fiscal year ending March 2013. However, reconstruction demand will start to fade in 2013 and beyond..."

It's frigging simple! Evacuate Tokyo in April 2013, nuke it then boost GDP with the reconstruction!

yogibear's picture

Both Japan and the US will keep printing until they can't. Loss in confidence in the currencies is next in order.

Bank holidays and trying to stop the mass exodus out of both is next. Where have we seen this movie play before?

SheepDog-One's picture

I already 'mass exodus'd' a while back.

Gigantor's picture

How can Japan possibliy ease any more?

Are they going to be printing Yen, putting it in dumptrucks and just dumping it in the middle of every major city? Pay people to go into debt?

Most sane people can see that the machine is broken and taking us all off a cliff...like some poor passenger in a flaming car that is heading off a cliff  that can't get the seatbelt unbuckled. We see it, but the masters of the universe care not, they only care and only know about keeping that machine running, keeping the whole thing chugging along no matter what...even if it is running right in a freight train.

DutchR's picture

If they origami their bills it adds value.

ajk24455's picture

Wait they haven't ended deflation yet because up until now it wasn't required.  Oh, Ok.

Yen Cross's picture

 That was a good read Tyler. The 38.2% fibi on the move from 76.044 to 84.717 seems to have usd/jpy contained for the moment. I think the BoJ is really eyeing the 50% fibi that comes in around 80.00. 

tok1's picture

there is only one reason the Govt wants the BOJ to ease more (ie buy more bonds).. and thats to support govt spending.. which is out of control..  There  is rising energy / food cost.. since  March 11 so deflation has ended..   


if they really want to weaken the yen why not act like the swiss set a  min rate they want and sell yen unlimited at that level.. 

when will the BOJ/FED just admit.. the QE bond buying is to support Govt spending it has no relevance to economic growth .. Japanese  5ys is at 0.3%  if the Govt or any relevent business cant beifit from a a 0.3% 5Y  I cant see what 0.27% is going to help..



BigInJapan's picture

Widowmaker what?

Widowmaker who?