Japan: Post-BOJ meeting thoughts on the yen - Nomura

Bilal Hafeez, Research Analyst at Nomura, suggests that the recent BOJ actions should not be seen as the beginning of tapering, but rather as a messy shift from a quantity target to a price target (interest rates).

Key Quotes

“Former Fed Chairman, Ben Bernanke, echoed this in his interpretation of the BOJ’s action. Moreover, like the Fed’s shift away from money supply targeting in the early 1980s, it may take time for the full impact to be realised by the market. The rationale may also be similar insofar as the link between the quantity target and the economy (and yen) has weakened. When the BOJ first ramped up its balance sheet by engaging in QQE in early 2013, it saw the yen weaken, growth pick up and core CPI exit deflation for the first time since 2009. However since 2014 that relationship has broken down.

A much stronger relationship lies between Japanese equities and the yen, and also broad money and the yen. When equities and broad money increase, the yen tends to weaken and vice versa. Broad money includes everything from bank deposits to stock investment trusts, and so captures whether central bank liquidity has spilled over to the non-bank economy. If the Bank of Japan can keep short and long-term interest rates below where the economy suggests it “should” be, then this should provide significant stimulus to the economy. This in turn should see the yen weaken. The critical barometer to monitor would be Japanese stock markets.”