BOJ's success may hinge on fate of 'kamikaze' Trump rally
Japan Times -- Dec 27
The Bank of Japan, which has given up on achieving its 2 percent inflation goal by printing more money, is expected to fret over the fate of the "Trump rally" in 2017.

If U.S. Treasury yields continue to rise and the dollar extends gains against the yen, the BOJ might begin tapering its aggressive monetary easing. But once the yen turns upward, the central bank could be forced to implement additional easing once again, just like it’s done for the past several years.

“The BOJ wants to carefully assess sustainability of the rise in U.S. interest rates and the yen’s weakening trend since the U.S. presidential election,” said Naohiko Baba, chief economist at Goldman Sachs Japan Co.

2016 was turbulent for the BOJ. The central bank decided in January to apply a negative interest rate of 0.1 percent on some reserves held by commercial banks. In September, the bank shifted its policy target to “yield curve control” instead of boosting asset purchases.

At its two-day policy meeting through Dec. 20, the first since the U.S. election, the BOJ kept its 10-year government debt yield target unchanged at around zero percent, as well as its negative interest rate policy.

BOJ Gov. Haruhiko Kuroda denied the possibility of raising the yield target anytime soon, despite the continued rise of long-term interest rates after Republican Donald Trump’s victory.

“Promoting powerful monetary easing under the current policy is most appropriate” for now to realize 2 percent inflation, Kuroda said at a news conference after the meeting.

Should the BOJ successfully curb increases in government bond yields, the wider interest rate gap between Japan and the United States would weaken the yen further against the dollar, as the Federal Reserve is set to continue tightening monetary policy in line with economic recovery.

Expectations for Trump’s economic policies, centering on infrastructure spending and tax cuts, may also pump up stock prices, slashing demand for U.S. Treasuries and sending yields higher. Debt prices move inversely to yields.

A falling yen would push up import prices in Japan, which could help the BOJ attain its inflation goal, although core consumer prices, excluding volatile fresh food prices, were mostly stuck in negative territory during 2016.

News source: Japan Times
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