Abe And BOJ

 

There is practically no chance that the BOJ changes policy. BOJ shares the common dilemma among major central banks. Growth is ok–above trend, which in Japan is seen as about 0.8%, but price pressures remain weak. The core rate in Japan, which excludes fresh food, is up 0.5% year-over-year. The target is 2%.  

The BOJ and SNB are widely understood to be laggards in the long drawn out process of normalization. There have been two recent developments to note in this context. First, Abe looks posed to call as snap election, which the LDP and he will most likely win, which is why the election would be called early in any event. That means the continuation of Abenomics– and may increase the perceived chances that Kuroda gets a second term. In the US, there is a two-term tradition.  In Japan, it would appear to be the first time in 50 years that a BOJ governor has a second term. The point is the snap election strengthens the case for continuity.   

The second point is that Abe, like Trump, are influencing their central bank, not through rhetoric designed to lobby for a certain policy and challenge the independence of the central bank, but through the power of appointment. Two new members join the BOJ board with this meeting. They seem to be on Kuroda’s side of the activist monetary policy debate and the need to continued stimulus. 

In Europe, there is a concern that officials are running out of securities. Some worry that the BOJ buying is adversely impacting liquidity. Draghi seemed to play down these concerns recently. Kuroda too has argued the liquidity is not a problem, which means that purchases (running less than the targeted JPY80 trillion, a year) can continue.

The stronger world growth is spilling over and helping the Japanese economy. The transmission mechanism is Japanese exports. Last month, Japanese exports were 18.1% higher than a year ago. It is the largest rise since late 2013. In August 2016, Japanese exports were nearly 10% lower from a year ago.