BoJ should introduce foreign bond-buying scheme to weaken yen

By:
Peter Garnham
Published on:

If the Bank of Japan (BoJ) wants to weaken its currency, it should not miss the opportunity to ride the current wave of central bank activity to undermine its currency.

The BoJ’s meeting on Wednesday presents an opportunity for the central bank to follow the recent moves from the Federal Reserve, the European Central Bank (ECB) and, before that, the Bank of England, and introduce fresh quantitative easing (QE).

That would placate Japanese politicians, who have increased the rhetoric against the strength of the yen in recent days.

However, some argue that just opting to increase the size of its balance sheet will not produce the sort of sustained weakness in the yen that the BoJ and the country’s economy require.

"I am not sure that just doing more QE will achieve much, as it hasn’t delivered a weaker currency for long in the past, so a bigger bazooka is clearly needed," says Maurice Pomery, chief executive at Strategic Alpha.

He says the state of the country’s economy justifies bold action, given that continued strength in the yen is occurring at a time when Japanese companies face a drop in global demand and escalating tensions with China, one of their biggest customers.

Indeed, Pomery believes taking the momentum from the ECB and the Fed makes so much sense that the BoJ’s credibility will be diminished – if it can fall much further – if it fails to act.

"This is not the time for waiting; this is the time for action," he says.

"There has been a reluctance to go ahead and intervene unilaterally but amongst the recent rhetoric there has been a suggestion they may consider buying foreign bonds, and we may see this announced."

That should appease some of the central bank’s domestic critics and see the yen weaken sharply, especially against the euro and the Australian and New Zealand dollars.