Citi Explains Kuroda's Dilemma: "Please Sell More Yen Cause I Can't"

Via Citi's Steven Englander,

In WSJ interview: “He described the U.S. economy as "recovering very strongly" and stronger than Japan, saying that should not result in a higher yen. "In this kind of situation, I don't think it's reasonable to expect the yen to appreciate against the dollar." And “when the time came for the BOJ to withdraw its easing measures after having achieved its stated price goals, he didn't expect the yen to rise. "I really don't think the yen should appreciate even in that situation”.

Kuroda is telling investors not to buy JPY just because the BoJ is being very reticent on  policy ease. This week’s Nikkei dip below 14000 and JPY below 101 were likely viewed a s very negative developments, given the headwinds that the sales tax increase will generate. Hence the strong effort here to draw a line under the JPY, and delink it from monetary policy.

There is an important  second message which is intended to be delivered to the Japanese bureaucracy --  “But Mr. Kuroda also acknowledged limits to what the BOJ can do to generate long-term growth. "Unless (Japan's) growth potential is raised, the end result may be only the 2% inflation target achieved but real growth is meager," he said. "That is not good." … Mr. Kuroda used his strongest language yet to urge Prime Minister Shinzo Abe to take advantage of the continuing economic recovery to quickly carry out promised overhauls aimed at bolstering growth. “

There has been considerable disappointment in the third arrow and quite correctly BoJ Governor Kuroda is emphasizing that you can have just as mediocre an economy with 2% inflation as with 1% deflation. The major Japanese structural reforms have been pushed further into the future, and the BoJ (in common with the Fed) is being expected to deliver a solution to deep-seated structural problems with easy money. The BoJ is pushing back against this, and is probably afraid that to give a further does of monetary ease without something being delivered on the structural front.



Bottom lines:

1)      Every CB gets a couple of shots at talking down its currency without changing policy – then the impact shrivels.  The BoJ probably has one or two more bites at this apple, but the impact will likely be falling


2)      If they are really as reticent on delivering near-term policy ease as they sound, they will need some help from Japanese portfolio outflows to get JPY weaker. There is speculation that pressure on Japanese semi-official institutions is increasing.


3)      Japanese officials are very much looking on the bright side of life when it comes to incoming data, but we have yet to see the full brunt of the sales tax increase and it will become increasingly difficult to spin bad incoming data.


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