Business | FOCUS

Fears grow at BOJ that Trump tweets could terminate drastic easing program

by Tomoyuki Tachikawa

Kyodo

The Bank of Japan is becoming increasingly wary of tweets by U.S. President Donald Trump ahead of its first policy meeting since he took office, fearing his remarks could thwart its long-shot efforts to achieve 2 percent inflation and end decades of deflation.

Fears are growing among officials at the central bank that Trump might start to criticize it for manipulating foreign-exchange rates, given that its radical monetary easing measures are apparently aimed at devaluing the yen against the dollar.

Faced with Trump’s “America First” policy, which could see him pursue a weaker dollar to bolster U.S. exports, the BOJ could be forced to end years of aggressive monetary easing and begin tapering the easing policy later this year, some economists say.

Trump said in an interview with the Wall Street Journal that the dollar is too strong for U.S. companies to compete with Chinese rivals.

But the potential policy shift would likely choke investment and consumption at home amid rising long-term interest rates. This might drag down domestic demand and push down consumer prices.

Should the yen jump versus the dollar, import prices here will fall and Japan’s export-oriented economy might shrink because the yen’s appreciation usually makes Japan-made products more expensive abroad and reduces the value of overseas revenue when converted to yen terms.

“The BOJ is facing a Trump risk now,” said Masanobu Ishikawa, general manager of spot foreign exchange at Tokyo Forex & Ueda Harlow.

Trump said in a speech in Philadelphia last Thursday that the United States will include a clause preventing currency manipulation in all future bilateral trade deals.

His remarks came as the BOJ carries out its new “yield curve control” policy, which is designed to keep the targeted 10-year Japanese government debt yield at around zero percent by adjusting the amount of its bond purchases.

The policy, launched in September, has contributed to curbing rises in Japanese long-term interest rates. With speculation growing that the Japan-U.S. interest rate gap will widen further, the dollar has risen more than 10 percent against the yen since Trump won the U.S. presidential election on Nov. 8.

Mari Iwashita, chief market economist at SMBC Friend Securities Co., said the possibility cannot be ruled out that Trump will “criticize the BOJ,” arguing its monetary policy is “inducing” the yen’s depreciation.

Earlier this month, Trump threatened in a Twitter message to impose a “big border tax” on Toyota Motor Corp. if Japan’s biggest automaker proceeds with its plan to build a new plant in Mexico to produce Corollas for the U.S. market.

Amid pressure from Trump, Toyota President Akio Toyoda said his company will make $10 billion in U.S. capital investments over the next five years.

A foreign-exchange dealer in Tokyo said, “We are afraid of Mr. Trump’s tweets and remarks, which could be powerful enough to drastically change the financial market environment.”

“If Mr. Trump posts harsh comments about the BOJ’s policy, the bank may be forced to taper its monetary easing,” the dealer said.

Many BOJ watchers, however, said that moving to tapering — including reducing purchases of exchange traded funds from the market and raising the 10-year bond yield target — could deprive the central bank of a good chance to beat chronic deflation and attain its 2 percent inflation target.

At its two-day policy meeting through Tuesday, the BOJ is widely expected to upgrade its projection for real economic growth in fiscal 2017 ending March next year to 1.5 percent from November’s forecast of 1.3 percent, but prices are on the decline.

In December, the core consumer price index, excluding volatile prices for fresh food, fell 0.2 percent from a year earlier for the 10th straight month of decline, government data showed Friday.

While consumer prices are set to move out of negative territory sometime soon with an upturn in global crude oil prices and a falling yen driving up import prices in Japan, the pace of increase may slow, analysts say.

Takuji Aida, chief economist at Societe Generale Securities, said the year-on-year rise in core CPI could climb only to 0.7 percent by the end of 2017.

Since the BOJ is still far way from achieving its 2 percent inflation target, it would not be in a situation where it can raise its 10-year bond yield target in fiscal 2017, Aida said.

Naohiko Baba, chief economist at Goldman Sachs Japan Co., echoed that view, saying, “We expect the BOJ will choose to maintain the status quo at least through 2017.”

To examine the timing of a policy change, “the BOJ will want to carefully assess how sustainable the stock market rally is likely to be, coming on the back of the recent rise in U.S. interest rates and the stronger U.S. dollar,” Baba said.

At a news conference last month, BOJ Gov. Haruhiko Kuroda said it is “too early” to begin concrete discussions about a hike in the 10-year yield target, suggesting ending the stimulus program anytime soon would hamper the bank’s attempt to boost the economy and shore up inflation.

A person familiar with the central bank’s thinking said, “The BOJ has to carefully explain to Mr. Trump that its monetary easing is aimed at propping up domestic demand to realize 2 percent inflation, not decreasing the value of the yen.”

GET THE BEST OF THE JAPAN TIMES
IN FIVE EASY PIECES WITH TAKE 5