Forex Flash: BoJ grapples inflation targets – UBS

According to Research Analyst Gareth Berry at UBS, “The terms of office of BoJ Governor Shirakawa and his two deputies end on March 19th, and the names of three nominees to fill these vacancies are expected to emerge some time this week. Skepticism about the BoJ's ability to hit the new 2% inflation target is running high, and attention has naturally focused on whether the new leadership can bolster Japan's inflation-targeting credentials.”

In addition, investor disbelief is perfectly understandable given the previous lower inflation goal of 1% was never hit. Even the policy board itself has lingering doubts - members Sato and Kiuchi dissented against adopting the 2% target in January, implying that this higher target is not achievable with current policy settings.

However, as far as FX is concerned, “we feel it is necessary to draw a distinction between an inflation target and an easing target. Whether the new BoJ succeeds in boosting inflationary pressures is still an open question. However, there should be little doubt about the Bank's operational capacity and determination to implement more radical easing measures if required - more aggressive JGB buying for example. The evidence for this is overwhelming when we look back on how the Bank has performed against existing easing targets.” Berry adds.