The minutes of the BOJ minutes revealed that Japanese monetary authorities are clearly turning to a more dovish policy bias as the yen remains stubbornly high and the country’s export dependent economy continues to struggle. Although members agreed that the economy is returning back to growth, one member noted that the Japanese economy has failed to beat deflation after two years of easing hinting that a bigger policy action may be necessary.

BOJ members also suggested that the central bank should raise inflation expectations by influencing FX rates with MOF member noting that the central bank BOJ could hopefully raise prices by 1% in 2013. Several members reaffirmed the idea that the BOJ should send a strong message that it will take bold steps to reverse the current trend.

However, despite the discussion and a clear leaning towards a more accommodative policy stance, the BOJ has yet to undertake any dramatic action to weaken the yen. We have long argued that any FX intervention schemes will be reversed quickly by the market and only a sustained and substantial commitment to a massive QE program would reverse yen’s strength. The yen has been an unwitting victim of the Fed’s QE policy actions which have depressed US yields and as result lowered USD/JPY which is very sensitive to yield differentials between USTs and JGBs.

If the BOJ truly wants to see a lower yen, it must announce a massive QE program of its own in order to offset the impact of Fed’s actions. Up to now however, the Japanese officials have only made modest and gradual attempts at QE which have had little lasting impact on the currency. Therefore the yen remains near record highs, with USD/JPY trading today at the 78.00 level as risk off flows continue to push the pair ever closer to the key 77.00 level. The policy makers will need more than rhetoric in order to weaken the currency and stimulate demand in the morbund Japanese economy.

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