DavidMarsh

Bloomberg

Haruhiko Kuroda, governor of the Bank of Japan.

LONDON (MarketWatch) — Mario Draghi’s trademark policy of doing “whatever it takes” on the euro EURUSD, -0.50%   has now made the long journey to Japan — only with a distinctly different currency goal. Haruhiko Kuroda, the Bank of Japan governor, is plainly as determined as the European Central Bank president to stick to his monetary guns. But in Japan’s case the aim seems to be to weaken the currency, not to strengthen it.

The outcome of continued Japanese monetary easing, coupled with only lackluster results achieved so far in stimulating the economy under Shinzo Abe’s government in power now for nearly a year, is almost certain to be a further prolonged fall in the yen USDJPY, +0.15% Watch out for a slide from from the current 103 to the dollar to perhaps as low as 110 — a figure that could test how far the Japanese authorities wish to see the currency decline before sparking potential inflationary dangers.

The short-the-yen trades that were popular among hedge funds from summer 2012 onward look likely to be back in vogue in 2014.

All the signs are that the BoJ will carry on doing “whatever it takes” to raise inflation into the 2% range from the current 0.9%. Government-bond purchases of 50 trillion yen a year under the bank’s so-called quantitative and qualitative easing program could even be stepped up under the plan to double the monetary base within two years and end the country’s 15-year flirtation with deflation.

Renewed signs of the BoJ’s undaunted pro-easing boas have emerged at the same time as indications that the Ministry of Finance and the BoJ are following an overt interest-rate policy through the asset-purchase program. Over the period since Abenomics was unleashed in January, 10-year government-bond yields have been hardly changed at around 0.7% despite a 50% rise in the Nikkei index NIK, +1.39%  over that period.

Comforted by the BoJ’s massive monthly purchases, bond-market investors have been more or less ignoring the signals of higher inflation in the pipeline — which would normally be reflected in higher yields. Stock-market investors, on the other hand, have been following the opposite line, building into their valuations and projections of equity-price performance the expectation that Japan will indeed soon be posting 2% inflation.

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This is a somewhat shaky equilibrium that cannot be sustained indefinitely. The explanation to this apparent conundrum appears to be that the authorities are overtly targeting bond-market interest rates as well as the monetary base in the asset-purchase program.

The aim is to ensure that Japanese government bond yields rise (and bond prices fall) only several months after inflation has hit the 2% target.

At the same time, it seems clear that a much-rumored asset-purchasing switch to the equity market from the bond market by the government pension fund, a key holder of Japanese government bonds with a total of more than $1 trillion under management, is not going to happen any time soon.

All this gives a virtual safety net to investors in the bond market, including as dominant players Japan’s mega-banks, persuading them not to embark on large-scale bond sales — at least for the moment.

Signs that Abenomics is in for a long haul — and therefore the program of asset purchases may have to be kept going beyond the two years initially foreseen — have multiplied from several directions.

The annualized rise in growth of gross domestic product of just 1.1% in the third quarter announced last week, down from the 1.9% in preliminary data, was a big disappointment for those wishing to see firm evidence that the economy was back on the expansion track.

Moreover, part of the latest 0.9% inflation rate — hailed by Kuroda as a sign that the reflationary plan is “almost halfway” towards completion — has been caused not by home-grown inflation (including much-needed domestic wage growth), but by higher prices for energy and imported goods induced by the lower yen over the past year.

Perhaps most worrying has been the realization that the enormous increases in underlying liquidity in the economy, registered by the monetary base, have not fed through to stimulating the money supply or bank lending.

Just as has been happening in Europe, extra liquidity has been deposited for safekeeping reasons at the central bank, or has been lent abroad — so that Abenomics is probably benefiting Cambodia or Vietnam as much as Japan.

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