BoJ about to pull back on the monetary throttle - BBH

The Bank of Japan's meeting at the end of week has taken on greater importance after Governor Kuroda's comments before the weekend that spurred yen gains, suggests the research team at BBH.  

Key Quotes

“Investors have been particularly sensitive to changes in Japan's monetary policy.  By and large, they appear too ready to think the BOJ is already or is about to pull back on the monetary throttle.”

“The Yield Curve Control strategy announced in 2016 requires the BOJ to buy fewer bonds than under the Quality and Quantitative Easing that Kuroda introduced quickly on succeeding Shirakawa at the helm.  In addition, Kuroda argues that given that the float is less, it does not need to buy the same yen amount to have the same impact.  Buying fewer bonds then is the continuation of the course, not a deviation or tapering as is often claimed.”

“Until the end of the week, Kuroda has simply dismissed talk of an exit as premature.  However, he said before the weekend that a discussion of an exit may be appropriate at the start of the FY2019. In April next year.  The yen strengthened as if this were really new news.  The dollar was sold to its lowest level (~JPY105.25) since November 2016.”

“We struggle to see the news here.  The BOJ currently projects that inflation will reach its target around the FY2019.  Surely it follows from this that sometime around then the BOJ will more formally discuss how to exit from this prolonged aggressive monetary easing.  Indeed, we read Kuroda's comments to suggest there is little chance of exiting this year, and that is to say, we have not seen peak divergence.”

“When trying to think through the outlook for BOJ policy, our views are shaped by the planned October 2019 hike in the retail sale tax.  Given the importance of it in last year's election and the expansion of Japanese economy, we suspect it will be particularly difficult to postpone again.  It will boost inflation, which the BOJ will look through, as it did before, and pose a headwind to the economy.”

“Headline CPI of 1.4% y/y in January is largely a function of fresh food and energy.  When these are stripped out, measured inflation falls to around 0.4%.  The yen has appreciated by about 4.5% on a trade-weighted basis since early February.  This coupled with the 4.7% slide in oil prices in February warns of downside risks.”