Thursday, December 8 2022

No sooner had Bank of Japan Governor Haruhiko Kuroda finished insisting super-easy money was here to stay when authorities stepped in to mop up the damage. If there was any doubt that the main cause of the yen’s collapse this year was the BOJ’s prolonged easing in the face of interest rate hikes everywhere else, it was cleared on Thursday.

The finance ministry, which leads Japan’s monetary policy, stepped in to boost the beleaguered yen for the first time in decades. The buying strengthened the yen to 141 to the dollar; the currency had previously weakened past 145, the lowest since the Asian financial crisis of the late 1990s. Kuroda had barely left the BOJ newsroom, where he defended the board’s decision to maintain monetary parameters unchanged. These include rates in negative territory, a commitment to exploit near-zero bond yields, and forward guidance that allows for further easing. All this despite inflation well above the 2% target.

Masato Kanda, the government’s top foreign exchange official, told reporters that Japan had taken “bold steps” to crack down on sudden, one-way moves. This step followed weeks of jaws that largely failed to hold yen sellers. What Japan says and does in the days and weeks to come is essential. If the goal is to inject two-way risk into trading and cushion the decline of the yen, Japan may possibly score a tactical victory. If the ambition is to reverse the underlying direction, that is a much higher order. For this to happen, the policy needs to be broadly aligned across the spectrum in Japan. And as Kuroda spent the afternoon reminding everyone, the monetary arena will be all about extended stimulus.

The yen has been hammered: it has lost around 20% against the greenback this year. The main driver of the decline is the laxity of rates in Japan compared to America. The canyon between Federal Reserve Chairman Jerome Powell and Kuroda was underscored on Wednesday by the U.S. central bank’s third consecutive rate hike of 75 basis points and the projection of significant moves ahead. In a real-time display of Japan’s isolation, authorities in Indonesia, the Philippines and Switzerland hiked borrowing costs as Kuroda spoke at his post-meeting press conference.

The easiest way to sustainably lift the yen would be for the BOJ to raise the prospect that perhaps some sort of small shift could occur, albeit highly conditional. Kuroda’s refusal does not make it easier to support the yen. The bank’s preference for the glacial move is evidenced by the way it is phasing out a Covid relief funding program for struggling businesses. Many economists had predicted that the program would end this month. No one expected the BOJ to loosen its grip on 10-year government bond yields this week, which it pledged to keep near zero – with little room for maneuver on either side. Perish the idea that the main interest rate, always negative, should even be brought to zero. Japan has reasons not to go: Kuroda expects lower inflation and is wary of the global slowdown. The pace of price increases is the fastest in three decades, but remains below levels seen in the United States and Europe. He may be the last member of the “transitional team” still standing.

But that’s not to insist that further easing might be warranted. Kuroda is careful not to say anything that invites speculation that the long-awaited change is behind the scenes. Making even a small change to the forward guidance will force people to handicap the type of tightening Japan will consider. As troublesome as the BOJ may find this, it would offer some support for the yen. Without a whiff of change at the BOJ, unilateral intervention will do little to alter the yen’s underlying bearish trajectory.

It’s enough to make you wonder why Kuroda seemed to drop forward guidance a few months ago during remarks in New York. After emphasizing that the bank’s role was to support the nascent economic recovery, Kuroda made a startling observation: “At the same time, I don’t think the Japanese economy is in such a vulnerable position that further easing is necessary,” according to the text of a speech at Columbia University on April 22.

It would have been reasonable to expect the BOJ to take a more balanced line. Did Kuroda send out a trial balloon that didn’t go well internally? Has his speechwriter left the reserve? The governor went so far as to say at his Thursday press conference that the guidance could remain for two or three years. In practice, this only binds the bank as long as Kuroda is in the building. His second term ends in April.

Perhaps Kuroda has an eye for history. The few times in recent decades that Japan has raised rates – to levels that are still very accommodative – officials have had to retreat quickly. This came after higher boosts in 2000, 2007 and 2008 which were followed by global downdrafts. The lesson seems to be that the longer Tokyo waits to rejoin the rate cycle, the faster it backtracks.

Neither Kuroda nor the MOF say the yen should be a world leader. They know the fundamentals are moving against them. They circle the circle saying they don’t like too much excitement and speculation in the markets. They would probably prefer a more steady decline. But much of it is out of their hands. Before recent months, the Fed hadn’t hiked 75 basis points in a single jump since 1994. It has now done so three times in a row, with a fourth in November being entirely conceivable.

Earlier in his career, Kuroda was himself the top currency specialist at MOF and ordered his fair share of interventions. His comments after this action will be scrutinized even further. Officially, Japan will have to work hard to avoid being seen in open conflict. Directing the markets, or stabilizing them, is as much a question of rhetoric as it is of action. Sometimes symbols can also work. Kuroda wore a tie during Thursday’s press conference. He has recently preferred an open-necked shirt. We should have seen it all coming.

Japan has been caricatured over the years as a place where nothing changes. I have often found this review unfair. The BOJ is doing a great job of proving me wrong. It may be up to Kuroda’s successor to push monetary policy forward. Or upside down, depending on whether they’re willing to see the yen go down.

More from Bloomberg Opinion:

• 2023 rate shock could remain normal: Daniel Moss

• Tourists will love the yen. Will Japan like them? : Gearoid Reidy

• Fed splits difference on labor market pain: Jonathan Levin

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

More stories like this are available at bloomberg.com/opinion

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