Say goodbye to Mr. Shirakawa and a strong Japanese yen

Masaaki Shirakawa chaired his last monetary policy meeting this week as governor of the Bank of Japan (BoJ); but even before his departure, tolerance of a strong JPY was already killed off by the new government. What follows now could be the next big leg down in the JPY exchange rate.

Haruhiko Kuroda, widely expected to be the new governor, uttered that now very familiar sentiment expressed by central bankers of doing “whatever” we can do to end deflation in Japan. He complained that the BoJ had failed to do enough monetary stimulus, suggested it could target longer-dated government bonds, start its aggressive monetary stimulus sooner than next year and should try to raise inflation to 2% within two years.   

Next month Kuroda will have an opportunity to demonstrate his radicalism and may well start open ended asset purchases by the BoJ within months rather than next year. Such a commitment is likely to see JPY quickly crash through the USD/JPY 100 level mooted as a target exchange rate level by Japan's authorities. Depending on the tolerance of other major central banks toward the BoJ's policies, JPY could even reach USDJPY110-115 by the end of the year if not much sooner.

USD already breaking out against JPY

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