Why the BOJ Refuses to Increase Stimulus

Additional easing from the Bank of Japan? No dice. BOJ Governor Kuroda and his gang of policymakers decided to sit on their hands once more, declining to dole out more stimulus even though Japan is back in recession.

As you’ve probably guessed, the Japanese yen had a bullish forex reaction to the announcement, with yen bears closing out their short positions and sulking in disappointment.

USD/JPY 15-min Forex Chart

USD/JPY 15-min Forex Chart

Judging from the tone of Kuroda’s press conference, it seems that the Japanese central bank has no plans of expanding its current easing program anytime soon. Heck, BOJ member Kiuchi still made his dissenting vote to taper asset purchases from 80 trillion JPY as usual!

According to their official statement, BOJ policymakers assessed that the Japanese economy has continued to recover moderately. They even went on to say that private consumption remains resilient, thanks to improving labor and income conditions. Last time I checked, Japanese retail sales data missed expectations of a feeble 0.4% year-over-year uptick and actually posted a 0.2% decline, wage growth has been tepid, and the economy posted a 0.2% contraction for Q3 – something that Governor Kuroda attributed to a temporary fall in inventory investment.

Central bank officials admitted that export activity and business production have weakened due to the slowdown in emerging markets, underscoring the latest trade balance release which indicated that shipments in October fell for the first time in more than a year. Earlier this week, the tertiary industry activity index posted a surprise 0.4% decline instead of the estimated 0.2% uptick while the all industries activity index showed a 0.2% drop.

In terms of price levels, BOJ Governor Kuroda insisted that inflation expectations appear to be rising and that the economy can achieve its 2% CPI target by the second half of next year. Looking at the latest inflation readings, however, suggests that Japan still has a lot of work to do before moving closer to its goal. Producer prices are down 3.8% on a year-over-year basis in October versus the projected 3.5% decline while the core CPI readings in Tokyo and the entire country are still in the negative territory.

Despite all the downbeat economic reports, policymakers maintained that their QQE program is having its intended effect and that they will carry on with this plan until the price stability target of 2% is reached. As always, the policy statement concluded by indicating that the BOJ will “examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.” Nothing we haven’t heard before.

In a nutshell, BOJ policymakers seem to be in no mood to ramp up their easing efforts, keeping their glass-half-full outlook that the Japanese economy ain’t doing that bad. This is supported by Kuroda’s view that the next round of wage negotiations could put upward pressure on inflation and that Japanese companies will do their part in keeping price levels afloat.

With that, the Japanese yen could be able to regain ground against its forex counterparts, as more market watchers come to terms with the low likelihood of additional BOJ easing despite weak data. Forex risk sentiment also seems to be favoring the lower-yielding yen for now, as geopolitical tensions are on the rise again. Keep in mind, however, that the BOJ still has one more monetary policy statement lined up before the end of the year so it will be interesting to see if they’ll shift their stance by then.

  • ForExchange

    Hi Forex Gump,

    a very interesting article, especially to see the comparison how the officials see it and what the data shows us.

    If I might, I see two things a little more than you do:

    1. Geopolitical tensions:
    Obviously tensions do influence the markets, sometimes even in a big way. But at the moment I do not see anything that would influence price action in a big way because of tensions. Looking at the last years (many years) there have always been wars somewhere. The situation is always a little different, but not in a big way IMO. I even go further, I do believe the contrary that we are in a risk on sentiment. I am trading exotic currencies. Check those charts how they are beating up USD and EUR big time the whole week. So one risk off currency (USD) is having a bad week, and another one – CHF – is also beaten up a big way. Only the JPY can fight with the others. So for me this is more risk on sentiment.

    2. The other thing is not a contradiction, but a comment.
    I always take apart in your poll votes. Today, 2 answers are about the weakening JPY and one is about a floating one. What about buying it? 🙂 I went long with it vs. CHF and made nice results!

    Have a great weekend,


    • Hey FE, I always appreciate your feedback on my posts! If anything, I take it as a sign that I’ve written a piece that’s worthy of discussion when I see your comments 🙂

      You’ve made a really strong point about the impact (or lack thereof) of geopolitical tensions on financial markets. I think I’ve also seen an opinion piece somewhere showing that the previous big attacks had very little aftermath (2-3 days), and it seems that we’re seeing more of the same these days. I mean, equity indices have mostly been closing higher even with all the uncertainty!

      I must’ve been anticipating the usual risk-off reaction of currencies to things like these when I wrote this post but a review of price action shows that we did see otherwise. Thanks for pointing it out!

      And as for the poll, I guess the second answer might be closest to a bullish yen bias (no further easing scenario). Congrats on your CHFJPY win! I don’t normally watch that pair but now that you’ve mentioned it, I definitely will!

      Have a great weekend, too! Looking forward to more discussions with you 🙂

      • ForExchange

        Yes, if you check the monthly charts for CHF pairs, there were plenty of good investment (not really trading) opportunities on the board. Most pairs already moved away a little upward vs. the CHF, but not all and there are plenty of opportunities left! The recent CHFJPY trend had many great opportunities to trade to the downside. However as both of them are risk off currencies, it is not the easiest pair to trade 🙂

        • Yeah exactly! I’m always feeling torn when looking at CHFJPY since both are risk-off currencies, though I’m mostly CHF bearish too just because of lingering SNB intervention fears. Looking at the comdolls vs. CHF as I write 🙂