Derek Halpenny, European Head of GMR at MUFG, notes that following his interview in the Wall Street Journal where he stated that a sustained period of yen strength could impact inflation and hence prompt monetary action, Governor Kuroda today in the Diet repeated again that there was scope for further easing and that the BOJ had not reached its policy limits. Key Quotes “Indeed, Governor Kuroda stated that there was “plenty of room” to lift quantitative easing further and to lower the key policy rate further into negative territory. QQE won’t reach its limit for “years” he added. In fact we can’t recall a time when Kuroda was as forceful as today in emphasising the capacity the BOJ has to increase its QQE program further. We believe it is also clear from Kuroda’s comments today that he wishes to put some distance between linking monetary action to the level of the yen “directly”. But he does also state that the yen is an “important indicator” – after the G20 in Washington last weekend, the Japanese authorities will need to be very clear that any additional action from here would be directly related to achieving its inflation goal and only indirectly related to the level of the yen which had perhaps altered the balance of risks in achieving that goal. Governor Kuroda did however stop at the point of ‘helicopter money’ and dismissed this policy option as something not possible as it would require “unified monetary and fiscal policy”. We’re not quite convinced by this and it is a particularly blurred line in Japan when it comes to monetary and fiscal policy. The scale of purchases being undertaken by the BOJ surely is on a scale that places some doubt over the division between central bank monetary policies and government fiscal policy. JGB yields are falling hard – the 2-year yield hit a new record low of -0.27% yesterday and there is certainly scope for further declines. Our sense is that the risk of monetary easing next week is growing and certainly looking at the JGB market with yields falling notably, market participants generally are sensing an increased chance of action. The comments in the Wall Street Journal and the comments again today from Governor Kuroda will do nothing to dispel that increased expectation of action. We can certainly envisage amid the current scepticism in financial markets over the power of monetary policy that any action next week may have limited impact on weakening the yen. But over the medium term, stepped up action by the BOJ that essentially further blurs the line between monetary and fiscal policy will certainly have an impact and it would be hard to envisage a scenario of the yen continuing to strengthen notably, especially if broader financial market conditions remain as they are now. That’s especially the case given the extreme long speculative yen position that appears evident in the market at present.” For more information, read our latest forex news.