Bank of Japan officially enters the currency wars

The Bank of Japan (BoJ) today signalled readiness to expand stimulus “without hesitation” if downside risks to inflation were to rise.

Until now, the BoJ had acknowledged downside risks to both growth and inflation, but had given little explicit guidance that it would ease policy. It has kept more quiet than the Federal Reserve (Fed) and European Central Bank (ECB).

There were no major changes to the overall monetary policy framework at the BoJ’s July meeting. The short term policy rate was kept on hold at -0.1%, the 10-year government bond yield target kept at “around zero per cent”, alongside an unchanged ¥80tn annual pace of JGB purchases.

In its quarterly Outlook Report that accompanied the announcement, the BoJ yet again revised its inflation forecasts* down to 0.8% year-on-year (y/y) and 1.2% y/y in (fiscal year) 2019 and 2020, respectively. These exclude the effects of the upcoming consumption tax hike.

The growth projection for 2019 was edged down slightly to 0.7% y/y and remain unchanged at 0.9% y/y for 2020.

Ultimately, inflation well below its target is nothing new to the BoJ and its growth projections actually remain fairly healthy by Japanese standards.

Its “ready to act” stance is aimed at stopping the Japanese yen from appreciating against a backdrop of heighted expectations for easing from both the Fed and the ECB. In other words, the BoJ has officially entered the currency wars.

It is well known to investors that the BoJ has little ammunition to ease further, given  that interest rates are already negative and a full blown asset purchase programme. We believe that the BoJ will be reluctant to ease further, but so far will be quite happy about its ability to keep the yen fairly stable.