The performance of the JPY (strengthening) and Nikkei (falling notably) over the last few days suggests a market that is expecting to be disappointed by tonight’s BoJ Governor Kuroda’s speech. However, as Citi’s Steve Englander notes, given the recent Bernanke-Carey-Draghi actions, we suspect there will be some temptation for Kuroda to speak out whether ex cathedra as BoJ Governor or with his personal view Bernanke style so as to get the NKY-JPY train back on track.
Via Citi’s Steve Englander,
BoJ Governor is scheduled to give a speech July 29 in Tokyo (1130pm ET tonight in NY) at the Research Institute of Japan. He may be strongly tempted to take a BCD (Bernanke-Carney-Draghi) approach and tell investors that the BoJ’s easy policy will be easier for longer than they expect.
Right now little is expected at the speech. However, looked at from the BoJ perspective both tapering and the subsequent Fed pentimento have been clear negatives for Abenomics. The initially hawkish read on the Fed led to a backing up of Japanese rates that derailed the Nikkei; the subsequent Fed backtracking reinvigorated its dovish credentials and led to a pull back from the Nikkei resurgence.
CB Governors with zero rates at the short end are desperately looking for new policy instruments. The Fed is using forward guidance (and speculation of a shift in the Fed’s target) to convince investors that rates will stay low forever. QE for the moment looks as if it will be shut down so arguing for zero rates as far as the high can see is the next best thing to beat long rates low.
The BoJ can certainly argue even more credibly than the Fed that rate will be low for a long time and argue that they intend to keep real rates low for a long time. They are unlikely to increase QE given how big the size already is and there is no reason to believe that a bit more will change outcomes very much. Given that they are starting so far below their target they have a powerful tool in committing to negative real rates out the curve. This would chase savers out of the JGB market, bid up assets elsewhere and probably weaken the yen significantly. Saying nothing would probably lead to another yen boost, given that central banker silence is viewed as consent.
The chart above shows that almost all the increase in exports is driven by higher prices. Both real and nominal exports are indexed to 2012=100. Real exports are up by 1% versus 2012; nominal by 12%. So we have some favorable translation effects but only a bit of gain on the real side. On balance we see some temptation for Kuroda to speak out whether ex cathedra as BoJ Governor or with his personal view Bernanke style so as to get the NKY-JPY train back on track.