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The Yen Gains Traction on Concerns over Future Quantitative Easing

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The Yen Gains Traction on Concerns over Future Quantitative Easing

The BOJ left rates unchanged this week and continued their quantitative easing program that expands the monetary base at a pace of 60 trillion yen to 70 trillion yen per year. There were not any additional stimulus measures. Optimistic remarks from Governor Kuroda, who sees the recovery remaining on course and a fading negative impact from April’s sales tax increase, could be a problem if Japan does not continue to act. The impact from the April tax hike looks likely this year, which should eventually prompt additional stimulus measures.

Japan’s economy has improved as the Bank of Japan’s stimulus has lifted domestic growth, spurred exports and returned annual CPI growth to positive territory. The Bank remains optimistic over its ability to return the economy to underlying inflation growth of 2% by 2016 alongside a shift to sustainable economic growth. Governor Kuroda did not mention additional stimulus in his press conference. In April, he said there was no need for a further easing at the current juncture and that it was not appropriate to comment on specific easing measures.

The BOJ perceives that the drag from the tax hike will not mount, and the Bank of Japan will not need to implement further stimulus this year. This could be a mistake, which could see the Japanese economy slip back into recession. Moreover, the lack of any discussion of further stimulus threatens to lift the yen, which in turn undermines the outlook for exports and total growth. Although a July stimulus is not out of the question, the most recent meeting and comments from the Governor have trimmed the chances of such action near term.

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