Stock rally, weak yen give BOJ reprieve
Trump-fueled investor exuberance could halt if protectionist presides
YUKI FUJII, Nikkei staff writer
TOKYO -- With the stock market rising and the yen weakening, a mood of relief prevails among Bank of Japan officials. The cause of the end-of-year holiday cheer? Expectations are rising on U.S. President-elect Donald Trump's stated policy of stimulus spending and tax cuts. In addition, falling oil prices have stabilized after OPEC agreed to curtail production. In a nutshell, the overseas factors that have hindered the bank's long-cherished goal of 2% inflation have finally dissipated.
"The BOJ is in a comfortable environment," a central bank official said a month after Trump won the election, which spurred the yen's fall and a rise in stocks.
Prior to Trump's surprise victory, the year had been marked by a stronger yen and falling stocks after the BOJ introduced a negative interest rate policy in late January. These developments dented the Japanese economy, and midyear, the U.K.'s vote to leave the European Union further aggravated them.
While the yen's recent sharp fall apparently came as a surprise to the BOJ, many officials acknowledge that it has helped abate a yearlong stagnant mood at the bank.
The November OPEC agreement to cut production was also a fortunate development for BOJ. The reason for this is seen in a BOJ staff paper posted on its website on Dec. 2.
The report, titled, "Why [the BOJ] failed to achieve a 'price stability target' of 2% in about two years," concludes that when the fiscal 2015 consumer price index was at 0.0%, 1.0 percentage point of the failure was attributable to falling oil prices during the year. In other words, half the reason the BOJ missed its target was because of oil.
It's no wonder the OPEC agreement and subsequent rise in oil prices would exhilarate officials.
Another factor bringing relief to the BOJ is that it established, after a review of monetary policy in September, a new framework to stabilize interest rates through yield curve control in which the bank will manage short- and long-term interest rates. By introducing the powerful tool of fixed-rate purchase operations, the bank has succeeded in containing the upward pressure on domestic interest rates caused by a sharp rise in U.S. long-term rates -- at least for now.
On Tuesday, the yield on new issuance of the 10-year Japanese government bond was an annual 0.050%, the highest level in about 10 months. Although excessive rate rises could dampen the real economy, the BOJ official assured investors that the bank can avert such a scenario.
"No worries -- we're here to limit the rates," the official said. The bank apparently expects to be able to maintain the yen's weakness by stabilizing Japan's long-term rates at sufficiently lower levels than U.S. rates, widening the rate spreads.
However, Trump is a double-edged sword for the BOJ. The current environment of a weak yen and strong stocks is being driven by market expectations focused on the positive side of the president-elect. But if Trump grows wary of a strong dollar and shows his protectionist side, no one knows how the market will react.
"If he makes comments in his inaugural speech that show he won't tolerate dollar strength, that'll surely result in a higher yen," the official said.
Relief may be short-lived for the BOJ.