BoJ require assessment of the bigger picture before easing

BoJ require assessment of the bigger picture before easing

Written by: Tim Messenger

The Yen is beginning to become challenging for the Japanese economy as both inflation and consumer sentiment continue to diminish. Inflation presently sits at 0.5 % (precluding the sales tax hike and food prices) and might possibly even head towards negative territory. The purpose why consumer sentiment has declined is due to the frail yen and weak confidence that will likely to follow the currency on any additional downward moves. This present impediment concerns the BoJ as it is cautious to ease policy even further as the yen will further plunge to a fragile state.

Inflation has attained such lowly levels in a no small part due to the dropping commodity prices, specifically oil. Diminishing commodity prices should be an benefit for both commodity and consumers via lowly prices along with lower cost correspondingly, hence increasing the likelihood of cost-push inflation.

Moreover, prices are beginning to outperform wages so with a weaker yen consumers will be less able to purchase goods hence, reducing growth and subsequently decreasing the money supply in the market.

As a result, the BoJ will be more apt in keeping monetary policy mostly unchanged for the moment. Further weakening of the yen will further limit consumer sentiment and repress wage growth, which will push the BoJ away from its present 2 % target inflation.

Moreover, the BoJ requires strict scrutiny of the bigger picture; China, Europe, Australia and Canada have all adopted an easing style and this might possibly trigger a global currency war. The BoJ should be cautious of this circumstance as this could result to heavy currency devaluation and may further result in Japan regressing back into recession.

The world is hoping that the Fed will not raise rates, as it will increase their borrowing costs at a substantial cost. An estimated $9 trillion is the amount in loans that is owned by non-banks outside the U.S. Emerging markets liability is in the U.S. currency and hence a rate hike will damage growth for the said countries. In the present climate, the Fed is unlikely to increase its rates until the second and third quarter of 2015 while it waits for more positive data and a development in global outlook.

It is noteworthy to take note that a rate hike may actually be a good for countries that are easing monetary policy, as their commodities will be more aggressive in the open market. Furthermore, demand is picking up as U.S. producers and consumers will be able to purchase more of their products.

Finally, in the interim it can be noted that the pair is definitely bearish. Traders (Open a forex account to trade a wide range of currency pairs) are expecting additional negative data to come out from the Japanese economy due to the general global slowdown. In addition, there is anticipation that the BoJ will be keeping monetary policy a holdover in order to prevent a currency war and restore consumer confidence. The U.S. is in a better position and will be unlikely to raise its rates yet the positive data is more likely to result in to the U.S. dollar rally higher.