In his battle against deflation, newly elected Prime Minster Shinzo Abe was able to put enough pressure on the Bank of Japan (BOJ) to double its inflation target to 2%. Not only that, but his calls for unlimited money printing and other aggressive monetary policies have also helped weaken the yen against the dollar by as much as 13% since mid-November.
But now that monetary easing is all but priced in, investors are looking to the government to put its money where its mouth is. Unfortunately, Abe's promises aren't low-hanging fruits. In fact, there are already three factors that could keep the government from reaching its 2% inflation target.
1. Japan's finance minister doesn't agree with Abe's proposals
Yesterday, Japan's finance minister Taro Aso verified that buying foreign government bonds to weaken the yen isn't one of his options. This is in direct contrast to Abe's earlier statements that the BOJ is considering such an option. Not surprisingly, the yen got bumped up after Aso's statement. After all, if Abe's finance minister (and political party mate) won't support his plans, then who will?
2. The BOJ doesn't know HOW to achieve its new target.
One look at the BOJ's latest meeting minutes will reveal that its board members are conflicted as to HOW they can achieve their new targets. While they're all in favor of further easing, some members think that a short-term inflation target of 1% is more realistic given that 2% inflation hasn't been achieved in two decades.
As for which tools they could use, there have also been recent discussions on the possibility of extending short-term bonds, purchasing longer-term bonds, and even ditching the interest rate floor, but coming to an agreement on the central bank's various options is easier said than done. It could take months before the BOJ can come up with a plan that most can agree on.
Furthermore, with BOJ Governor Masaaki Shirakawa set to step down next month, the BOJ might put any bold moves on hold and schedule them for a later date. The next central bank head will likely tread lightly in the first couple of months of his rule and opt to continue with the bank's current programs before stepping things up a notch.
3. The yen's weakness is starting to get out of hand.
Whereas a strong yen was hurting Japanese exporters, a weak yen seems to be causing pain to Japanese importers. Pressure from domestic companies who have had to shoulder higher importation costs might just push the government to temper its actions against the yen.
The Prime Minister, Finance Minister, and BOJ officials have agreed to pursue a 2% inflation target, but the question of HOW they'll achieve this goal remains unanswered. I don't know about you, but I can't help but wonder if Japan's inability to come up with a concrete plan to realize its goal is enough to warrant losses for the yen.