February 16, 2017 5:30 am JST
BOJ watch

After summit, Japan's central bankers can relax -- for now

Much-feared yen bashing did not come up in meeting

MASAYUKI YUDA, Nikkei staff writer

TOKYO -- The Bank of Japan may have moved clear of the cloud of uncertainty that was last weekend's U.S.-Japan summit, but the road to the 2% inflation target is still long and fraught with obstacles.

Multiple senior BOJ officials said they breathed a sigh of relief after hearing how well the meeting went. Since the beginning of the year, U.S. President Donald Trump had been on a verbal rampage against countries with trade surpluses against the U.S. that also have weak currencies. It was almost a given that Trump would lash out against the soft yen when he met last Friday with Prime Minister Shinzo Abe. The president could have even held up as Exhibit A the BOJ's ultraloose monetary policy, which has supported the yen's depreciation.

The Japanese central bank has maintained that the policy was implemented to boost inflation, not weaken the yen. But that is certainly a diplomatic line. Because it is anybody's guess what hazards the next day will bring, it is in the BOJ's best interest to make sure it is not exposed to criticism.

In the end, Trump did not directly assail the cheap yen at the summit. The two sides are even working on an economic dialogue framework between U.S. Vice President Mike Pence and Taro Aso, Japan's deputy prime minister, who doubles as finance minister. That is one of the biggest lines of communication to Washington that Tokyo is securing outside of Trump, who is prone to off-the-cuff remarks.

The Japanese government reported the results of the summit to the Diet on Wednesday. "We were able to receive an understanding on the necessity" of the current monetary easing policy, Abe said. Aso followed up by saying he looks forward to speaking with America's new treasury secretary within the context of a yen that has started trending stronger against the dollar.

The BOJ's easy money policy will also receive a shot in the arm if the U.S. raises policy rates. On Tuesday, Federal Reserve Chair Janet Yellen told the U.S. Senate that the central bank will evaluate whether another rate hike is called for during upcoming meetings.

In that scenario, the divergence between long-term interest rates in Japan and the U.S. would likely spread, which would put pressure on the yen to recede against the greenback. Then there would be a fair chance that rising import prices and accelerated economic growth would add legs to the BOJ's quest to reach the inflation target.

The BOJ believes that the current easing measures target at long rates are going well, but that does not necessarily mean the central bank holds an optimistic outlook.

If the "America first" touting Trump sees any future yen weakening having a negative impact on the U.S. manufacturing sector, it is not likely that he will let it slide. There is no guarantee he won't revisit the currency dispute.

On Wednesday, BOJ Gov. Haruhiko Kuroda told the Diet that there is a "considerable distance to the 2% price stability target." That suggests the bank recognizes that everything may not be smooth sailing from here.

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