Chief economist update: Japan yearns for a weaker yen

The last time we heard some sort of policy guidance from the Bank of Japan (BOJ) was in early February this year when governor Haruhiko Kuroda was quoted as saying that: "If (currency moves) are having an impact on the economy and prices, and if we consider it necessary to achieve our price target, we'll consider easing policy."

At its March meeting, the BOJ maintained current interest rate settings and promised to continue with quantitative and qualitative monetary easing (QQE) with yield curve control aiming to achieve the price stability target of 2%.

It's optimistic outlook noted that: "Japan's economy is likely to continue its moderate expansion, despite being affected by the slowdown in overseas economies for the time being. Domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the corporate and household sectors..."

However, the BOJ downgraded its outlook for exports though, saying that, "exports have shown some weakness recently" and are "projected to show some weakness for the time being."

This is hardly a surprise given the yen's persistent strength that's compounded by the global growth slowdown. The yen has depreciated by 1.1% versus the greenback this year to date, still short of reversing the 2.7% appreciation against the strengthening US dollar it notched up in 2018.

The yen has appreciated by 0.5% versus the euro this year to date, after strengthening by 7.0% in 2018.

Recent stats show that the yen's strength is "having an impact on the economy and prices."

The BOJ quarterly Tankan survey of confidence among the country's big manufacturers dropped by 7 points - the biggest decline since December 2012 - to a two-year low reading of 12 in the March quarter from 19 in the December 2018 quarter. According to a BOJ official, "Many manufacturers said they grew concerned over the outlook of the Chinese and other Asian markets on the back of slowing demand." You can add the appreciating yen to this.

The Tankan large manufacturing outlook index portends the pessimism continuing in the coming quarter with the reading falling to 8 in the March quarter from 15 in the previous three-month period.

Japan's headline consumer price inflation remained at a 15-month low of 0.2% in February while core inflation eased to 0.7% from 0.8% in January and after peaking at 1% in October last year.

The latest forward guidance from the Fed - the minutes of the 19-20 March FOMC meeting reaffirmed its commitment to leave interest rates on hold this year - and a similar one from the European Central Bank's (ECB) April meeting - it kept interest rates unchanged and reiterated that it would keep interest rates at record low levels until the end of 2019; and, is set to launch TLTRO III in September; and is currently studying tiered deposit rates - should provide upward impetus on the Japanese yen going forward.

While the weakening Japanese economy and renewed easing in inflation suggest yen depreciation, its relative monetary policy differential, particularly against the United States and the Eurozone, indicates otherwise.

Time for the BOJ to "consider easing policy."

Read more: Bank of JapanEuropean Central BankHaruhiko Kuroda
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