USD/JPY Monthly Fundamental Forecast – August 2016

The USD/JPY closed at 102 after the Bank of Japan held rates and made little change to its policy while the Abe government announced new fiscal spending but it is spread many years. The Bank of Japan may have begun to retreat from its “whatever it takes” policy stance, effectively shifting pressure to the government to use fiscal spending and structural changes to help revive the economy.

The central bank announced only a modest dose of monetary stimulus Friday, disappointing investors who expected a bolder move to complement a new government spending package.

That alone was taken as confirmation by many economists that the BOJ has run up against the limits of monetary policy. The BOJ’s plan, also announced Friday, to conduct a “comprehensive assessment” of the effects of its policies at the next policy board meeting in September underscored that conclusion.

Now the BOJ will examine that impact of its JGB purchases on the market as part of its policy assessment, which will look at the effects and drawbacks of its easing measures, Mr. Kuroda said. The central bank will also examine how low short- and long-term interest rates have affected the health of commercial banks, he said.

Mr. Kuroda said he and the other eight board members will “candidly examine what is needed … to achieve our 2% price-stability target at the earliest possible date.”

Toshihiro Nagayama, chief economist at Dai-Ichi Life Research Institute, was among economists who concluded from the BOJ’s actions and Mr. Kuroda’s words that quantitative easing had reached its limits, and was looking for a way to make them more sustainable in a longer battle against deflation than originally expected.

The more extreme options include helicopter money, a catchall term for dumping funds straight into the economy by giving it to consumers or printing new money to finance more government spending. Central bankers generally see this as dangerous, but some specialists say Japan may be running out of options.

The central bank “clearly disappointed the market today,” said Michael Moen, a bond manager at Aberdeen Asset Management.

“Reading between the lines, the bank appears to be acknowledging the limits of its policy tools, and the focus going forward will need to be on a combination of fiscal and monetary stimulus,” he said.

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