Kuroda Easing Doomed as Yen Seen Missing 120 Level: Japan Credit

Feb 18, 2014 10:38 pm ET

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Feb. 19 (Bloomberg) -- Strategists’ forecasts signal the Bank of Japan will fail to reach its 2 percent inflation target as yen declines next year won’t be sufficient.

Japan’s currency will tumble 11 percent to 115 per dollar in 2015, according to a Bloomberg of analysts, short of the 120 level economists estimate will be needed for consumer prices to reach the BOJ’s goal. The breakeven rate, which reflects bond investors’ expectation of future inflation, signal a 1.16 percent increase in the cost of living in the coming decade. The figure is 2.16 percent in the U.S. and 1.35 percent in Germany.

The yen had its biggest drop in more than a week yesterday after the BOJ boosted lending programs and Governor Haruhiko Kuroda said he will continue to buy bonds flexibly and won’t hesitate to adjust policy if risks emerge. The currency has still appreciated 3 percent this year as a rout in emerging markets spurs demand for a haven.

“There’s almost zero chance” of the price target being reached by mid-2015, said Kazuhiko Ogata, the chief Japan economist in Tokyo at Credit Agricole SA. “The yen exchange rate is really crucial, but unfortunately going forward the pace of yen depreciation should be much slower than the past year.”

Two-thirds of economists in the Bloomberg survey conducted Feb. 6-12 said the yen needs to drop to at least 120 for Kuroda to reach his inflation target. Of the 34 responses, only two economists said the goal is achievable and half said the central bank will eventually abandon the objective.

The yen was at 102.26 per dollar as of 9:11 a.m. in Tokyo. It tumbled 18 percent in 2013, the biggest drop since 1979.

Lending Program

Japan’s two-year yields fell yesterday to their lowest level since April after the BOJ maintained a pledge to expand the monetary base by up to 70 trillion yen ($684 billion) per year. The central bank also doubled the core portion of a low- cost funding program to 7 trillion yen, which was established in 2010 to provide banks with funds at 0.1 percent.

The decision came a day after a government report showed gross domestic product expanded an annualized 1 percent in the fourth quarter from the prior three-month period, less than median projection of 2.8 percent in a Bloomberg poll. Real growth is estimated to contract 3.9 percent in the second quarter, the sharpest drop in three years, as the nation faces a two-stage doubling of the 5 percent sales tax starting April.

Prices excluding fresh food rose 1.3 percent last month from a year earlier, pushing the core consumer price index more than halfway to the BOJ’s 2 percent target adopted in January last year. In April, the BOJ initially anticipated that the goal could be achieved in two years.

JGB Positive

“It will be more and more challenging for the BOJ to push the inflation rate any higher because the consumption tax hike will weigh on consumers,” said Credit Agricole’s Ogata, who forecasts the yen will slump to 115 by year-end and estimates 130 is necessary for the inflation target to be reached.

Failure to achieve the inflation goal will be good news for Japanese government bonds because it will encourage the central bank to buy more debt, according to Ogata.

Economists surveyed by Bloomberg expect the BOJ to expand its record monthly bond buying of about 7 trillion yen this year, as Japan’s sales tax increases hurts economic growth. The purchases will be in a range of 6 trillion to 8 trillion yen, Kuroda said yesterday.

Japan’s 10-year government bond yielded 0.6 percent yesterday, compared with 2.71 percent for U.S. Treasuries. The two-year rate touched a 10-month low of 0.06 percent.

The Ministry of Finance will offer about 1.2 trillion yen of 20-year bonds today.

BOJ Believers

Yuji Shimanaka, the chief economist at Mitsubishi UFJ Morgan Stanley Securities Co., was one of only two economists in the survey who expect the BOJ to meet its price target.

“Even if the yen bottoms out, its positive impact on the economy will have a one-year time lag,” he said. “Additional easing is not necessary as the effects of BOJ stimulus will continue. The BOJ’s goals are guaranteed by the size of expansion of its monetary base.”

The BOJ’s monetary base is estimated to grow to about 270 trillion yen in the first quarter of 2015, exceeding the 259 trillion yen needed to achieve 3 percent nominal growth and inflation rate of 2 percent, said Shimanaka, who cited the so- called McCallum rule, named after Carnegie Mellon University professor Bennett McCallum.

Wages Fall

Japan’s economic recovery depends on whether wages can keep up with inflation and sustain growth, according to Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo and former central bank official.

Monthly wages excluding overtime and bonus payments fell 0.6 percent in December from a year earlier, extending a decline to 19 months, according to labor ministry data. The central bank projects consumer prices excluding fresh food will rise 1.9 percent in the 12 months starting April 1, 2015, excluding the effects of a higher consumption levy.

“I expect the yen to drop to 120 per dollar by the end of 2015 but I don’t think that’s sufficient,” Kumano said. “We need to see growth in wages continue for a self-sustaining recovery.”

--Editors: Naoto Hosoda, Pavel Alpeyev