BOJ Inaction

June 16th, 2016 6:21 am | by John Jansen |

Maybe the BOJ was taking its cue from 17th century English poet John Milton’s famous sonnet which concludes with the famous line, “They also serve who only stand and wait”. Maybe the BOJ thought that its  paralyzing inertia would not move markets. They were wrong as yen surged versus the dollar.

Via the WSJ:
By Alex Frangos
Updated June 16, 2016 1:21 a.m. ET

The Bank of Japan had its reasons to wait. But the cost of inaction could seem rather large in retrospect.

Japan’s central bank scheduled its policy meeting Thursday after the Federal Reserve’s to be able to react to whatever the Fed did. The Fed signaled fewer rate increases were coming, which means a weaker dollar, which means a stronger yen, which means the heat should have been on the BOJ to pull some sort of trigger. Instead, it will wait for its meeting at the end of July, also scheduled the day after the Fed’s next rate-setting meeting.

So why did the BOJ do nothing? The economy should get a boost from the government’s decision to delay an impending value-added tax increase. And activity data hasn’t been terrible of late. Domestic political considerations may have played a role with an upper house election scheduled for July 10; the BOJ may have wanted to stay clear.

Yet inflation isn’t on the BOJ’s side. The policy statement accompanying the decision noted consumer inflation will be negative or zero “for the time being.” A stronger currency will ensure that.

The strong yen means import prices will continue to fall, negating any virtuous effect from the rally in commodities of late. And with destabilizing events such as “Brexit” on the horizon, a further strengthening of the yen could make life increasingly uncomfortable for Japanese exporters and Japanese stocks, which are already off 17% this year.

There is a fair amount of skepticism that even if the BOJ expands asset purchases incrementally, say, deeper into exchange-traded funds or into corporate bonds, or sets benchmark rates more negative, that it won’t make much of a difference anyway. But with outright deflation again looming, and the Fed holding back, the BOJ is unlikely to stay inactive for much longer.

Write to Alex Frangos at


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