Toyoo Gyohten, a former currency policy chief at the Finance Ministry, says 2016 will be the year for Prime Minister Shinzo Abe to take up the mantle of stimulus from the Bank of Japan, which has done all it can to revive the economy.
While the yen will hold losses from a four-year decline, it is unlikely to weaken beyond ¥130 per dollar as the Federal Reserve raises interest rates only gradually and the BOJ keeps policy on hold, said Gyohten, who was involved in negotiations leading up to the 1985 Plaza Accord to weaken the U.S. currency.
Central bank bond buying has come at a price, pushing yields on shorter-term notes below zero percent and causing some primary dealers to complain of low market liquidity.
“The Bank of Japan’s monetary policy isn’t the biggest item on the economic agenda next year,” Gyohten, 84, said in an interview in Tokyo on Dec. 22. “The BOJ probably isn’t thinking about firing off a huge hit. What’s needed isn’t a further strengthening or expansion of the current quantitative easing.”
The mix of fiscal stimulus and monetary easing known as “Abenomics” has spurred corporate profits, increased tax revenue and fueled an 80 percent gain in the benchmark Topix since Abe’s election in December 2012.
The government this month announced a supplementary budget for the fiscal year ending March 31, after the BOJ delayed its time frame for meeting a 2 percent inflation target. Abe also urged companies to deploy record cash for investment and wage increases.
Benchmark 10-year sovereign debt is set to complete a six-year gain, the longest in data back to 1986. While the BOJ maintained its plan to increase the monetary base at an annual pace of ¥80 trillion at a Dec. 18 policy meeting, it also lengthened the average maturities of Japanese government bonds it buys to seven to 12 years from seven to 10 years.
The central bank is unlikely to achieve its 2 percent inflation target next year and any discussion about clearly changing policy, including quantitative easing or zero rates, will be a topic after 2017, said Gyohten, who used to serve as vice finance minister and is now president of the Tokyo-based Institute for International Monetary Affairs.
Consumer prices excluding fresh food rose 0.1 percent in November from a year earlier, according to a statistics bureau report Friday.
As the BOJ keeps its current policy, a gradual increase in U.S. interest rates next year will support the dollar against the yen, according to Gyohten. The Japanese currency could weaken but won’t fall to ¥130 per dollar, he said. It was at ¥120.32 as of 10:20 a.m. Tuesday.
Masafumi Yamamoto, the chief currency strategist at Mizuho Securities Co. in Tokyo, forecasts the yen’s losses will be capped at about ¥127 even as policy diverges.
“The probability is low for additional BOJ easing,” he said. “Right now, the government and the BOJ have put emphasis on the bad influence of the weak yen on income redistribution. Their stance is that there’s no need for further stimulus.”
An increase in government action could relieve pressure on the BOJ, which became the biggest holder of JGBs through its monthly bond purchases of as much as ¥12 trillion. The strain on the market may worsen as an increase in tax revenue allows Abe’s government to fund next business year’s budget without increasing new bond issuance, which is forecast to fall to the lowest since fiscal 2009.
“The core of Abenomics in strengthening the overall economy is making a progress and won’t be derailed,” Gyoh-ten said. “The issue for Japan is whether it can really show the path toward recovery and turn the corner next year on investment and consumption — Abenomics’ ultimate economic policy goal — or become a very disappointing case, even if such a probability isn’t big. The year 2016 will be crucial.”
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