Just when you thought that most central bankers have already caused enough chaos in the forex market this week, Bank of Japan Governor Kuroda stepped up to the plate and revealed that policymakers are already discussing an exit strategy from their QE program. Jaws dropped (and so did the yen pairs) when Kuroda claimed that the Japanese economy can be able to reach its inflation target by next year, eliminating the need to pump more cash into the economy.
A quick review of the latest data from Japan shows a few green shoots, and this probably explains why BOJ officials are feeling more upbeat these days. Economic reports released earlier this week, namely the tertiary industry activity index and the trade balance, printed better than expected results. Tertiary industry activity picked up by 0.3% instead of showing the estimated 0.6% drop for February while the March trade balance showed a surplus for the first time since 2012.
However, majority of the latest releases from Japan still came in the red, indicating that there’s a lot of work to be done before their economy is able to recover. For one, the flash manufacturing PMI for April slumped from 50.3 to 49.7, which means that the industry contracted this month. The latest industrial production report was also significantly weaker than expected, as the reading showed a 3.4% decline, its sharpest drop in eight months.
More importantly, inflationary pressures have weakened once more, with the national core CPI falling from 2.2% to 2.0% in February – its seventh consecutive monthly decline. Minus the effect of the sales tax hike last year, consumer price levels were actually flat during the month. That’s a long way off the government’s 2% inflation goal!
This is why most forex market watchers were taken by surprise when Kuroda mentioned in his speech in Parliament that policymakers are already considering the technical details for a QE exit. He suggested that they could raise the rate on excess reserves parked with the central bank or they could conduct money market operations to absorb the extra liquidity from their latest easing efforts.
Of course this spurred a wave of cautious remarks from several economic hotshots, among which was the former currency chief at Japan’s Finance Ministry. According to Makoto Utsumi, exiting stimulus could be a “nightmare” for the BOJ since this move would cause bond yields to surge and make it more difficult for the government to pay its debts. Recall that the Japanese government has already made an attempt to trim its growing deficit by increasing the sales tax in April last year, unfortunately causing a prolonged downturn in consumer spending.
At the end of the day though, the mere idea of a QE exit was enough to support the Japanese yen against its forex counterparts yesterday, but it remains to be seen whether upcoming economic data will warrant this move or not. Do you think the BOJ can really afford to exit their QE program soon?