The Bank of Japan (BoJ) as expected did not announce additional easing measures in connection with today’s monetary meeting. Following the Swiss central banks (SNB) aggressive intervention in the FX market yesterday, effectively putting a ceiling under EUR/CHF, there was some speculation that a similar aggressive move from Japan at some stage was possible and something might happen as soon as today in connection with he announcement from the BoJ meeting.
While the BoJ and the Japanese government is concerned about the impact of the strong yen on the economy, it is important to understand that Japan is mainly trying to stem further appreciation of the yen and unlike SNB it is not actively pursuing a weaker currency. The main explanation is that the negative impact on the economy from the recent exchange rate development is substantially less in Japan. Since the start of the 2011, the yen has appreciated by 3.2% in effective terms compared with a 13% appreciation of the effective Swiss franc exchange rate (before yesterday’s intervention). In addition Switzerland is a small and open economy compared with Japan and hence much more sensitive to exchange rate development. We estimate that the appreciation of the yen since the start of the year will subtract only around 0.15 percentage points from GDP growth over the next year.
That said monetary policy in Japan has one important similarity with switzerland: It is increasingly being driven by the exchange rate development. Expansion of the BoJ QE programme is increasingly being done to support intervention in the FX market. The implication has also been that that QE has become more aggressive since autumn last year, as illustrated by the faster expansion of the BoJ’s balance sheet, although the BoJ continues to trail other central banks. The BoJ expanded its QE programme (asset purchases and fixed rate lending) by JPY10 trillion to JPY50 trillion at its previous monetary meeting on 4 August. So far the asset purchase programme is only 50% utilised and thus there is ample room to expand the BoJ’s balance sheet within the QE measures that has already been announced. Hence, it makes little sense for the BoJ to announce new QE measures at this stage.
In our view, monetary policy in Japan will continue to be closely connected to exchange rate development. Hence, the amount of further QE by the BoJ will, to a large degree, be dependent on how successful Japan is in stemming the appreciation of the yen. With continued risk aversion and possible further QE in the US, we expect that the market will continue to test USD/JPY lower, but is poised to be met by further intervention and QE by the BoJ and, if needed, substantially more aggressively than Japan has done so far. A weaker yen would be dependent on a recovery in risk sentiment and the global economy.USD/JPY increased 0.6% to 77.2 on the back of the announcement from the BoJ.
