The Outlook of Future Foreign Exchange Markets, Episode 96 [Tomotaro Tajima]

Tomotaro Tajima Profile

Economist. CEO of Alfination. Born in Tokyo in 1964. After graduating from Keio University, he shifted career from Mitsubishi UFJ Securities (today MUFG) to analysis and research spanning finance, economics in general, strategic corporate management, and ultimately personal wealth formation and fund management. He serves as a lecturer for lectures, seminars, and trainings hosted by private companies, financial institutions, newspapers, local governments, and various business associations, totaling about 150 lectures per year. He is a prolific contributor to print media, with serial writings and comments in Weekly Gendai’s "Rules of Net Trading," Examina’s "Money Maestro Training Course," and more. He also writes columns on stocks, foreign exchange, and other topics across numerous websites, earning high regard as a stock and FX strategist. He also writes for the Home Economics section of Liberal Democratic Publishing's "Basic Knowledge of Contemporary Terms." After regular appearances on TV (TV Asahi's "Yaji-uma Plus," BS Asahi's "Sunday Online") and radio (MBS's "Tsurumasa's Asaichi Radio"), he currently serves as a regular commentator on Nikkei CNBC's "Market Wrap" and Daiwa Securities Information TV's "Economy Marche." His main DVDs include "Very Easy to Understand: Tomotaro Tajima's FX Intro" and "Very Easy to Understand: Tomotaro Tajima's FX Practical Technical Analysis." His major books include "Wealth Reassessment Manual" (Pal Publishing), "FX Chart: The Formula for Profit" (Alchemix), "Why Can FX Make You Wealthy?" (Texts), among many others. The latest publication is "Profit by Riding the Rising US Economy" (Liberal Democratic Publishing).

Is There an "Exit" from the Bank of Japan’s Unprecedented Easing?

Finally, 2018 (the Year of the Dog) has begun. It is obvious that the Year of the Dog is the “preceding year” of the 12-year cycle when the unified local elections occur every four years and the Upper House elections occur every three years in the same year. Also, in October of the coming year, a further consumption tax hike is scheduled.

Therefore, the government and ruling party will desperately want to sustain a favorable economic trend this year and next. For Prime Minister Abe, it is essential to avoid delaying again the timing of a consumption tax hike due to economic slowdown.

In that context, the aim is to secure a victory in the Liberal Democratic Party leadership race this year for a third term, strengthen the ruling party’s base in the next nationwide and Upper House elections, and finally realize the long-cherished constitutional reform.

Thus, for the time being, the government will likely pursue economic stimulus policies, and, of course, the Bank of Japan will align its stance accordingly. The Abe administration, for whom “the stock market is life,” will not overlook excessive yen strength, and Governor Kuroda is unlikely to deliberately sow the seeds of yen appreciation.

In fact, at the January 22–23 Bank of Japan Policy Board meeting, the current policy stance was kept, and in the subsequent press conference Governor Kuroda firmly stated that we are “not yet at a stage to consider an exit from monetary easing.”

Afterwards, the dollar-yen briefly moved toward yen weakness, but couldn't resist the ongoing strong trend of dollar weakness, ultimately turning toward yen strength again. Nevertheless, Governor Kuroda’s resolve to not show any hint of moving toward an exit remains clear: “We must not show any sign of moving toward an exit for a while.”

Not to overstate it, for the time being Governor Kuroda likely believes that he must not even utter the word “exit” (not even the letter “E”) aloud. Currently, if he did, USD/JPY, cross currencies, or the Nikkei stock average would sharply fall, and personally I even wonder, “Is there really an exit from the Bank of Japan’s unprecedented easing?”

In any case, the BOJ will likely be forced to continue ultra-easy policy for the time being. Meanwhile, in the United States, the Federal Reserve is already beginning to continue rate hikes and shrink the size of risk assets.

I understand perfectly that the exchange market isn’t moved by theory alone. However, the undeniable fact that monetary policy directions of the US and Japan diverge so greatly will eventually influence the market when it chooses to align.