Markets Are Still Overpricing the Chance of Bank of Japan Action
Markets Are Still Overpricing the Chance of Bank of Japan Action
(Bloomberg) -- Markets are wrong to assume the Bank of Japan will deepen its negative rate because the Federal Reserve is cutting interest rates and the European Central Bank has expanded its stimulus, a former executive director at Japan’s central bank said.
Since the yen isn’t at a critically high level, the BOJ won’t ramp up its monetary easing at its Oct. 30-31 meeting unless the government has plans for an extra stimulus package, Hideo Hayakawa said.
“To say the BOJ will be in trouble if it did nothing is absurd because there is no global easing competition,” said Hayakawa, now a senior executive fellow at Fujitsu Research Institute. Unless the Fed gets much more aggressive with its rate cuts and the yen strengthens beyond 100 against the dollar, a move by the BOJ to deepen its short-term negative rate is “out of the question,” he said.
The comments come amid heightened speculation that the central bank will take action at the end of the month after it called for a review of how the global slowdown is affecting the economy and prices. Governor Haruhiko Kuroda said last month he was closer to adding stimulus than he was in July and that lowering the negative rate was among his options.
Market players are pricing in a rate cut at the meeting, with overnight-index swaps signaling an 97% probability of the rate getting lowered to -0.2% as of Tuesday morning.
Hayakawa remains unconvinced. “The hurdle is very high to deepen negative rates and it’s ridiculous to talk about it when the dollar-yen is around 106-107 currently,” Hayakawa said. Since the interview the yen has weakened to 108.4 against the dollar. “As long as the pace of Fed easing remains as it is now, the yen won’t appreciate so sharply,” he said.
Yen Stability
Hayakawa said two key factors for the exchange rate were helping keep the yen more or less stable against the dollar. The growing share of direct overseas investment in Japan’s current account surplus has reduced currency-risk premiums since most of the money is kept abroad and not repatriated, he said. At the same time, pressure to strengthen the yen toward its purchasing power parity is weakened by Japan’s interest rates, which are still well below those of the U.S., he added.
Lowering the rate also risks a public backlash if commercial banks respond by raising their service fees to maintain profitability, he said.
If the risk of losing price momentum stems from a deterioration of the economy, it’s up to the government to step in, he said. In that scenario, the BOJ would likely do something to show it was cooperating with the government.
“As long as the government doesn’t act, the BOJ will stick to a ‘zero response’,” he said.
--With assistance from Sumio Ito.
To contact the reporters on this story: Chikako Mogi in TOKYO at cmogi@bloomberg.net;Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net;Toru Fujioka in Tokyo at tfujioka1@bloomberg.net
To contact the editor responsible for this story: Paul Jackson at pjackson53@bloomberg.net
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