Date: 03 Sep 2018

JPY: Kuroda Comments on BOJ Monetary Policy

When the Bank of Japan (BOJ) said in July it would keep Japanese interest rates ‘extremely low’ for an extended period, while adjusting monetary policy to afford itself greater flexibility in its asset purchase programme and permitting a slightly greater degree of movement around zero per cent for 10-year Japanese Government Bonds, the market began to wonder, as evidenced in a Reuters poll, if this meant the BOJ was preparing the ground for an eventual exit from its policy of massive monetary stimulus, even if the timing for that remained somewhat distant. What the market has now had clarified, following an interview by the Yomiuri Shimbun newspaper on Saturday with BOJ Governor Haruhiko Kuroda, is that at the BOJ “There is no thought about raising (rates) for quite some time.” Admittedly Kuroda wasn’t prepared to specify what ‘quite some time’ meant but the BOJ Governor did say that “As long as uncertainties remain, the commitment is to maintain the current low rates,” citing the October 2019 prospective hike in Japan’s consumption tax as one specific uncertainty. As for whether the BOJ would reach its 2 per cent target for inflation during his current term as Governor, Kuroda said “Of course.” That term ends in 2023. But what does any of this mean for the currency market? As ever it depends on a trader’s underlying view. In a circumstance of risk aversion where the JPY attracts a ‘safe haven’ bid, it’s essentially irrelevant except that it reinforces the fact that there will continue to be a significant negative carry cost for running long of the Japanese currency against most others, and particularly versus emerging market high yielders (TRYJPY, ZARJPY). If however risk appetite returns to the currency market, the tone of Kuroda’s comments might again underscore arguments for running short of JPY against other currencies. At the very least however traders might wish to make a note of how Governor Kuroda is currently thinking, for future reference.

by Neal Kimberley, External Currency Analyst.

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