Can BOJ Handle An Overheated Yen?

Call it a Trillion Dollar question or what you will, but the Bank Of Japan certainly has its back against the wall. The country has been reeling under immense pressure from fast falling export numbers even as its currency continued to strengthen against the US Dollar. A close look at the country’s economy reveals deep-rooted demographic challenges. Crippled by an overtly strong currency the nation has been battling the possibilities imminent deflation even as Japans centenarian club rose by 4.5% this year.

Bank of Japan this morning has turned the tide in its favor by moving away from unstructured monetary based policy measures in its bid to fight age based slowdown and adopted QQE (Quantitative and Qualitative Easing) measures with stringent control over its long term yield curve. The Central Bank, however, has stuck with its -0.1% negative interest rate and has promised to continue buying Japanese Government Bonds at a gradual pace of 80 trillion Yen per year. The Central Bank had come under immense criticism for being one of the top owners of Japanese stocks. Back in July 2016, Governor Kuroda had nearly doubled his projected ETF purchases to speed up the country’s growth rate and put the economy back on a growth trajectory.

What might bring cheer to investors is the addition of the all important “Q” along with the commonly known “QE” programs that have caused much of the Global Financial disaster. BOJ for a change has surprised Global Markets and investors with a unique move that might be adopted by Economies facing similar challenges in the years ahead. Qualitative Easing is structured in a way that it shores up prices of the target asset even as it pushes down the Yield curve opposed to Quantitative Easing measures which are designed to primarily keep ultra-low interest rates across a broad spectrum of assets.

The Central Bank thus is eying to ramp up its purchase of short-term Japanese Government Bonds in its quest to induce liquidity measures so that the 10 year bond yields stay pinned at zero. The Bank, therefore, plans to expand its monetary base until its CPI numbers exceed 2% and sustain above those figures over a longer period of time. Incorporating the Yield curve control as an intrinsic part of its policy framework has been cheered by the Japanese markets so much so that the Nikkei has jumped 330 points from its previous close at 16492.

For now, the move appears to hold immense potential given the fact the economy is fighting the demographic challenges which so long was being dealt with monetary policies. Truth be told, the need of the hour was more of structured fiscal policies that evolve with time in such a way that it plugs the gap between falling inflation numbers and strengthening Currency valuations. Devaluing the currency might bring instant relief. However, it fails to create enough reasons for the aging population to reinstate faith in its Government. A country that relies on its exports does not necessarily need a Devalued Currency advantage if it pledges to stand as an epitome of Quality measures amongst its peers. For Japan it can’t get better, the Global economy for once might pause to watch the “Phoenix Rise from its Ashes.”