Japan may need to ease monetary policy further even as current account deficit hits record

A Bloomberg article suggests that the Bank of Japan may need to ease monetary policy further.

The Bank of Japan’s record policy easing is dwarfed by the Federal Reserve’s efforts, showing Governor Haruhiko Kuroda has plenty of room to expand stimulus after this year’s surge in the yen.

The CHART OF THE DAY shows the BOJ’s bond-buying program, launched in April, spurred growth in the monetary base that has now more than doubled since the 2008 financial crisis. That’s well behind the Fed’s quantitative easing, which has more than quadrupled the U.S. money supply. The lower panel has the yen strengthening more than the dollar over the period against peers as tracked by Bloomberg Correlation-Weighted Indexes.

“If the BOJ wants to achieve its inflation target, it needs to weaken the yen further,” said Toru Suehiro, a market economist in Tokyo at Mizuho Securities Co. “That will require a step up in stimulus. Compared with the U.S., the pace of growth of the monetary base isn’t that high.”

Japan, US Monetary Bases

Indeed, a report on Monday showed that the Japanese economy may have weakened in January. The Cabinet Office's economy watchers' survey showed that the current conditions index fell to 54.7 last month from 55.7 in December while the future conditions index tumbled to 49.0 from 54.7.

Unfortunately, further monetary easing and yen weakening could exacerbate the deterioration in Japan's current account balance. Another report on Monday showed that Japan's current account surplus shrank to a record low in 2013, with the December balance hitting a monthly record deficit of 638.6 billion yen.

Higher cost of fuel imports resulting from the weak yen has already pushed the annual trade balance to a deficit of 10.6 trillion yen, double that of the previous year.