BoJ: Exchange rate conspicuous in its absence – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that one notably absent feature of BoJ Governor Kuroda’s recent speech is that it did not once mention the stronger JPY in the last year as a factor that has undermined inflation or the effectiveness of monetary policy. 

Key Quotes 

“One might conclude that the issue of the exchange rate is highly politically sensitive and consideration of buying foreign bonds as part of the policy mix is not being seriously considered.

There is no evidence that the BoJ has any desire to influence government intervention policy.  Significant direct action on the exchange rate appears still off the table and strength in the JPY remains a risk that could again significantly dampen the effectiveness of monetary policy.

A further cut in NIRP, especially in the context of the USA Federal Reserve getting close to a second rate hike this cycle, could contribute to a weaker JPY.  The JPY may now have worked off a good part of its over-sold condition in early 2015, and is less likely to rise much more.  Perhaps the benign neglect of the exchange rate will be less of a problem going forward.

However, the lack of consideration of the exchange rate is one element that may become a problem if it resumes its advance this year.  This could occur if global investor confidence wanes, global growth falters or the US again puts rate hikes on the back-burner.”