BOJ: A Two-percent Target for the Yen

Published on April 15, 2019

A well-respected Japanese news outlet reported over the weekend that the Bank of Japan, in its quarterly outlook report scheduled to be released on April 25, will revise its inflation target from 2% to a 1.5% – 2.0% band.

Having missed, and postponed, the target for years, such a move could be seen as a simple acknowledgment of the reality of Japan’s slow potential growth rate and aging demographics. Indeed, Finance Minister Taro Aso confirmed as much in a quip before the Diet that with the economy in reasonable shape, only the press and BOJ itself truly care anymore at this point about hitting a 2% inflation target.

*** Our contacts in Japan, however, do not believe Bank of Japan Governor Haruhiko Kuroda will be ready to abandon the 2% inflation target quite yet, even as the forecast pencils in yet another miss. The primary reason, we understand, is pure and simple: to protect the currency, the Yen, from appreciation against the dollar in case of another potentially sudden, new-found, dovish turn by the US Federal Reserve. ***

A Miss in FY 2021

On April 24 and 25, the Bank of Japan will hold a Monetary Policy Meeting (MPM) and issue its latest “Outlook for Economic Activity and Prices” report.

That report will include a first look at the outlook for Fiscal Year 2021, which is expected to show inflation under the BOJ’s 2% target, reflecting recent global and domestic disinflationary forces. And that expected miss, in turn, has fueled speculation that the BOJ will adjust its 2% inflation target to the aforementioned 1.5% – 2.0% range.

But our contacts in Tokyo do not believe Kuroda is ready for such a shift, and indeed the Governor pushed back on the need for any imminent change to the BOJ target in a press conference overnight.

Despite the miss in the forecasts, and some grumblings from within, the Kuroda-led BOJ will, we believe, stay the course of continuing to urge (eternal) “patience” towards that day when it does eventually meet its target.

More to the point, we believe the hesitation to change the elusive 2% target is rooted in a concern that should the BOJ give any signals of a lack of complete commitment to full reflationary policies if needed, dollar yen could possibly plunge towards the 100 level in case the US economy were to suddenly decelerate further, and the Fed turn its gaze to the downside on rates.

That concern is only further amplified by the BOJ’s enormous ownership of both the Japanese domestic bond and equity markets already, and the deleterious impact of low rates on Japan’s banking system, both giving rise to concerns over ammunition, and the cost/benefit effectiveness of any further easing policies should they be needed.

Back to list