More BOJ Asset Purchases in Store?

Unless you’ve been living under a rock, you’d know that the Japanese yen has been rallying recently. After topping at the 84.00 handle, USD/JPY tumbled over the past few weeks and is currently trading below the 81.00 mark. Other yen pairs, such as EUR/JPY and GBP/JPY, have been retreating from their highs this year as well.

USD/JPY Daily Chart

What I’m finding a little unusual is that the BOJ chose to remain mum about the yen’s strength and further easing measures during their latest rate statement. After all, the BOJ is notorious for intervening in currency markets whenever it feels that the yen is strengthening beyond the Japanese economy’s comfort zone. However, the lack of jawboning from the BOJ this week gave the yen additional reason to climb.

Finance Minister Jun Azumi, on the other hand, seems to be feeling the pressure to tame the Japanese yen. Just yesterday, the Finance Minister hinted at the possibility of further monetary policy easing as he urged the central bank to take more aggressive steps to curb deflation. He reiterated that the Ministry of Finance is watching the yen’s movements like a hawk, emphasizing that they are ready to act when necessary.

Keeping those strong remarks in mind, most market participants now expect the BOJ to step up its asset-buying and loan program in their next policy statement at the end of this month. Forecasts range from an increase of 5 trillion JPY to as much as 10 trillion JPY in purchases of government bonds, which could include an extension of the bonds’ maturity from two to five years.

Why will the BOJ increase its asset purchases in its next meeting?

Many believe that the BOJ will send a strong message at the start of the Japanese fiscal year.

With market players watching the BOJ’s moves closely, it’s going to need to show that it’s committed to its fight deflation and strong economic growth. In fact, Azumi even said that the BOJ’s moves in April could dictate the course of the first half of the year!

The BOJ’s decision won’t just be for show though. The central bank will really need to boost its asset purchases if its forecasts for growth of consumer prices remain at 0.1% in 2012 and 0.5% in 2013 as analysts are predicting. Remember that in mid-February, the central bank announced its inflation target of 1% to combat deflation and promote price stability.

Adding financial stimulus could also help stem the yen’s gains. A couple of days ago we saw the yen make multi-week highs against its counterparts when traders flocked safe-haven currencies amid debt concerns in the euro zone and growth concerns in the U.S.

These two problems aren’t likely to go away anytime soon, so the BOJ will most likely do its part to make sure that its currency stays cheap enough to support Japan’s export industry.

Then again, until we hear clearer clues from the BOJ, talks of further easing will remain speculations. After all, the BOJ seems to be ignoring clamors for more asset purchases recently and they might decide to stick to their stance in the near term. Make sure you do your homework and brush up on Japanese economic reports to figure out whether the Japanese economy would need another boost or not!

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