BoJ: All you need is doves – Deutsche Bank

BoJ structure creates integrity issue, but it still continues to support weak yen, according to Taisuke Tanaka, Strategist at Deutsche Bank.

Key Quotes

“BoJ Policy Board members Takehiro Sato and Takahide Kiuchi, who had insisted on corrections of the bank's super-easing policy, have been replaced by Hitoshi Suzuki and Goshi Kataoka. This essentially means the entire BoJ board is made up of doves. Governor Kuroda is the prime advocate of super-easing, and Deputy Governor Nakaso, a career BoJ official, will likely continue to back him up. Kikuo Iwata, Yutaka Harada, and Kataoka are all researchers and analysts with a reflationary bent. Makoto Sakurai and Takako Masai were nominated to the Board based on their reflationist credentials. Suzuki, who has a Japanese banking industry background, may not support policies such as NIRP, but we expect him to toe the bank's line, as will Yukitoshi Funo.”

“We may therefore see board members' comments become more standardized (despite some potential variance in focus, with Iwata and other QE advocates asserting a sustained ¥80trn pace of annual JGB purchases). We expect them to concentrate on three main talking points: (1) the effectiveness of current BoJ policies and availability of other tools if needed, (2) sustained momentum toward the 2% CPI target, and (3) the need to pursue current easing policies given the remaining distance to that target.”

“Clearly, the loss of the board's ability to critically vet its current policies creates an issue with its integrity. There is a risk that increased consistency in the BoJ's stance will result in a further loss of confidence and interest among market participants because of their preserving the status quo and self-justifying. The BoJ has little effective scope for further policy implementation, and we think it would be largely unable to counter yen appreciation or weaker stock prices in the event of a risk-off move in overseas markets.”

“Outwardly, the BoJ's policies are firewalled from political influence. However, the current super-easing policy is clearly an integral part of Abenomics. We should note the recent plunge in the Abe administration's approval ratings as its strongarm approach to politics based on an absolute majority backfired.”

“However, our main scenario does not envisage dire straits for the BoJ. We think Prime Minister Abe has some space to work on restoring his approval ratings, helped by the lack of rival succession candidates (provided his health does not deteriorate). The guaranteed term of the BoJ's policy board members means its all-dove lineup is secure for now. In overseas economies, improvement in Europe and China is offsetting US weakness and is moderately risk-positive. In this context, the BoJ's lone persistence with easing among the G3 will likely continue to support a weak yen. We maintain our basic view that dollar-yen will continue to lack direction in the short term, with a low of 110, and will head toward 115-120 in the medium term.”