Over the weekend, we asked rhetorically whether "The BoJ is The Next SNB [12]?" after one BOJ official was overheard warning that "we have caused tremendous trouble for the financial industry," and many others growing anxious about continuing its massive purchases of government bonds and pressure from the financial industry is strengthening by the day "to scale back monetary easing soon." Overnight, it was none other than Goldman who reiterated precisely what we said, however when looking at the BOJ from the "other" angle - that of the central bank not doing enough to convince markets it will do everything in its power, i.e., print, until inflation is a "stable" 2%.
Here is Goldman's Naohiko Baba with why the "BOJ at risk of losing credibility over its price commitment"
The Bank of Japan (BOJ) kept its monetary policy unchanged, as we expected, at the Monetary Policy Meeting on January 20-21. Two noteworthy points from Governor Kuroda’s subsequent press conference were as follows:
1. The BOJ released its interim assessment of the October Outlook Report at the MPM, and sharply lowered its core CPI outlook – for FY2014 to +0.9% from +1.2%, and for FY2015 to +1.0% from +1.7% – reflecting the recent slide in crude oil prices. However, the BOJ maintains its view that its 2% price stability target is likely to be achieved by around FY2015.
2. The MPM did not discuss lowering the 10 bp interest rate on excess bank reserves, despite heightened expectations among foreign investors in particular ahead of the meeting.
We think the first point increases the risk of a loss of confidence in the BOJ. Like us, the BOJ expects a pickup in crude oil prices from midway through FY2015 and for this to result in renewed yoy core CPI growth. However, with the large downward revision to its core CPI outlook, the bank is more or less acknowledging a much lower possibility of achieving the 2% price stability target by around FY2015. Yet, at the press conference following the MPM, Governor Kuroda said he still held the view that 2% could be achieved by around FY2015. Domestic investors have been skeptical of the BOJ’s target from the outset, and now foreign investors are also beginning to question the BOJ’s logic and communication with the market. We believe the mixed signals the BOJ is sending may well serve to further undermine confidence in the bank.
With regard to the second point, we believe a thought process has taken place within the BOJ even if the latest MPM did not discuss lowering the rate. We think the bank has weighed up the costs and benefits of cutting the rate and ultimately concluded that 10 bp is necessary to maintain the existing quantitative/qualitative easing program under which it is effectively monetizing debt by purchasing close to 100% of newly issued JGBs.
We expect the feasibility of the BOJ’s scenario to diminish over time, prompting the bank to take further easing action once it can no longer put off the inevitable, either in July 2015 (when it releases its interim assessment of the April Outlook Report) or when it publishes the October Outlook Report. In our opinion, it is getting to the point where further yen depreciation and stock market gains are the only mechanisms that might allow inflation to move nearer to the 2% price target. However, with the bank’s hands tied in terms of accelerating the pace of JGB purchases, it may search for suitable alternative financial assets to buy.
Well, there is always crude, and both Putin and Maduro (assuming there hasn't been a military coup in Venezuela in the interim) not to mention countless shale junk bond investors, will be delighted by that kind of "out of the box" thinking.
As for the BOJ, it suddenly finds itself in a no way out situation: damned if it continues QE, and damned if it doesn't. How long until the "market" begins discounting this, and refuses to wait until the JPY becomes the next CHF? Because as so many FX brokers and their clients found out the hard way - it is always better to close short positions when you can, not when you have to...
