Why Does The BOJ Continue Easing?

Last updated 3/17/2010 3:12 AM ET (GMT -5) 5 Comments

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Boris Schlossberg

Director of Currency Research, GFT

As expected the BOJ left its benchmark rates unchanged at 0.1% but the central bank increased its quantitative easing program from 10 Trillion yen  to 20 Trillion yen as it bowed to government pressure to ease deflation. The move however, was not unanimous with the board splitting a 5-2 vote as policymakers grappled with the decision.

Japan continues its multi decade long  battle with deflation with the latest figures showing the GDP price index declining by -2.8% from a year ago. Nevertheless, the decline in price levels appears to have stabilized for the time being  and furthermore the latest gauges of Japanese consumer and manufacturing  data suggest a pickup in economic activity. Therefore Japanese monetary policymakers are hesitant to add too much monetary  stimulus to the economy at this time, but exchange rate pressures likely weighed on their decision to expand the QE program.

Yesterday’s action by the Fed may have had an impact on Japanese monetary authorities. By keeping the “extended period” language in its communiqué the Fed  signaled that US short term rate will remain stationary for the foreseeable future, putting downward pressure on USD/JPY. The Japanese fiscal authorities are loathe to see the pair trade below the 90.00 figure as most of the country’s exporters are hedged around this level. Therefore, the BOJ move on expanding its QE program may have simply been a countermove to offset  the dovish bias of the Fed and maintain the pair above the 90.00 handle for as long as possible.

Ultimately the direction of USD/JPY will be governed by the US economic data, specifically by the employment results. If the US economy begins to generate consistent positive job growth over the next several months, USD/JPY  will likely climb to 95.00 as rate expectations begin to rise. For now however the pair remains trapped in a very narrow 89.00-91.00 range.

Comments (5)

FXDragon

March 17, 2010 at 06:57 AM ET

Why does Japan have constant deflation?

bschlossberg

March 17, 2010 at 08:07 AM ET

Its the result of the massive real estate bubble of the 1980's

yen-jan

March 17, 2010 at 08:57 AM ET

and the brutal appreciation of the yen that was engineered by the Bush I and Clinton administrations ... It did not have the intended effect of rebalancing the Japanese economy; rather it pushed the Japanese economy into a sort of deflationary equilibrium, for lack of a better term. Yen went from 260 in 1985 to 80 in 1995.

MoneyManager

March 17, 2010 at 09:36 AM ET

It's also the result of a societal restructuring that has caused a severe demand falloff. Specifically, so-called "lifetime employment" (which even at its peak applied to only about 15 to 20 percent of the workforce) is a thing of the past. Salaries are, for many, static or shrinking. And the population is now shrinking as well, with some estimates calculating a *HALVING* of the Japanese population in the next 50 years or so. Capitalism seems to require endless expansion, or it collapses (which opens a tremendous can of worms on a planet with finite space and resources). Japan is going through a demographic transition unparalleled in human history (excluding perhaps war or the 14th century's Black Death).

yen-jan

March 17, 2010 at 07:37 PM ET

excellent point .. After posting my comment I was thinking that I should also have mentioned the demographic trend. By the way, most modern economic models take population growth to be exogenous, but that was not the view of the classical economists.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.