Haruhiko Kuroda may need to talk his way out of a paradox he helped create.
Installed as Bank of Japan chief in March, Kuroda aims to unlock borrowing and spending by lifting inflation expectations and wages after 15 years of deflation. Market volatility partly triggered by the BOJ’s record bond-buying now threatens to sap business and consumer confidence and weaken the campaign to reflate the world’s third-biggest economy.
At a press briefing on May 22, Kuroda said that gains in yields could be expected as the economy improved, after saying previously that the central bank aimed to lower interest rates. The next day, 10-year government bond yields reached the highest level in a year. Kuroda said today that he’ll keep strengthening communication with the market and that the unprecedented stimulus announced by the central bank is sufficient. Stocks swung today, sliding as Kuroda spoke, before paring yesterday’s decline, the biggest slump in two years.
“Kuroda failed to calm the market -- he couldn’t deliver a decisive message today,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute Inc. in Tokyo and a former central bank official. “Markets are still trying to understand who Kuroda is and how he will address problems.”
The Topix index of shares rose 0.5 percent today, after a 6.9 percent slump yesterday that was the biggest decline since the March 2011 earthquake and tsunami. Ten-year bond yields were at 0.845 percent after yesterday touching a one-year high of 1 percent. The yen gained 0.4 percent against the dollar to 101.59 at 6:39 p.m. in Tokyo.
The BOJ pumped 2 trillion yen ($19.4 billion) into the financial system yesterday as bond yields rose, its second such market-calming infusion this month.
On May 22, Kuroda said the BOJ wanted to avoid “excessive volatility” in the debt market. Speaking at a conference in Tokyo today, he reiterated that sentiment, and said he wants to stabilize bond trading with flexible BOJ operations.
This week’s “double talk makes us feel that Mr. Kuroda does not really understand what he is doing,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, formerly of Goldman Sachs Group Inc., referring to comments on yields. “If he thought that interest rates would rise if his policy succeeds, why did he say his policy would lower interest rates?”
Economy Minister Akira Amari yesterday warned against panic after the share market decline and a jump in the yen, saying that the economy is “recovering soundly.” Even after yesterday’s stock sell-off, the Topix (TPX), Japan’s broadest share measure, remained up 38 percent for the year.
Improving communication and eliminating “deflationary expectations” are two self-imposed tasks for Kuroda, 68, the former head of the Asian Development Bank, as part of Prime Minister Shinzo Abe’s campaign to revive the economy. So-called Abenomics also includes fiscal stimulus and efforts to reduce regulations impeding business. Prices excluding fresh food, the BOJ’s key measure, haven’t gained 2 percent in any year since 1997, when a sales tax was increased.
“For if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy,” wrote Krugman, a 2008 Nobel laureate in economics.
Kuroda won over investors on April 4, sending the Topix higher, when he unveiled bigger and more easily understood monetary easing, with a goal of 2 percent inflation in two years to be achieved by doubling the amount of money in the economy.
Central bankers sometimes stumble as they are learning the ropes. In the U.S., Ben S. Bernanke oversaw a Federal Reserve that stayed focused on inflation even as a credit crisis deepened in 2007, leading Kenneth Thomas, a lecturer in finance at the University of Pennsylvania’s Wharton School in Philadelphia, to say Bernanke had made a “rookie mistake.”
While Kuroda has moved markets before as Japan’s top currency official, his views now “carry much more weight,” said Akira Ariyoshi, a professor and director of the Asian Public Policy Program at Hitotsubashi University in Tokyo. “It takes the markets a while to understand the language of a new governor,” said Ariyoshi, who previously worked under Kuroda at the Finance Ministry.
“There’s always going to be uncertainties in the early period. Bernanke had his problems, too.”
After saying last month that BOJ bond purchases could drive down short- and long-term yields, Kuroda faces the reverse. Yields on benchmark 10-year government securities climbed about 23 basis points in the two weeks through May 17, the biggest such advance since May 2008, according to data compiled by Bloomberg.
Yesterday, the 17 1/2 basis-point gap between the day’s highest and lowest rates for the debt was the widest since April 5, the day after Kuroda announced unprecedented easing. The central bank, set to soak up the equivalent of 70 percent of the debt sold by the government each month, stepped in yesterday and on May 15 to try to limit volatility by injecting funds.
Abe and Kuroda are seeking to maintain the momentum of the nation’s recovery after the economy grew at the fastest pace in a year in the first quarter, with stock-market gains buoying consumer spending. Toyota Motor Corp. (7203), the world’s biggest automaker, forecast a 42 percent increase in net income for the 12 months ending March 2014.
Yesterday’s “huge volatility across markets is the biggest reminder yet for Kuroda that it’s not going to be a smooth trip to achieve the inflation target as the BOJ’s massive easing entails risks,” said Takahiro Sekido, a strategist in Tokyo at the Bank of Tokyo-Mitsubishi UFJ Ltd., and formerly a central bank official. He said that the BOJ could loosen a goal for monthly bond buying to add flexibility that could help to limit market volatility.
The BOJ decided last month to double debt-buying to more than 7 trillion yen a month, after Kuroda pledged to do whatever it takes to end deflation. The central bank aims to enlarge the monetary base, a gauge of money that includes physical currency in circulation plus assets that financial institutions hold at the BOJ, by 60 trillion yen to 70 trillion yen a year.
Kuroda said this week that the BOJ will adjust debt-buying operations as needed and that excessive volatility should be avoided, adding he doesn’t expect yields to “jump a lot.”
“We are at a scary point with the BOJ not really knowing the side effects of its easing,” said Richard Koo, the chief economist at the Nomura Research Institute in Tokyo. “It took more than a month for the market to realize the dark side of BOJ policies.”
Elsewhere in the world today, German business confidence for May rose after two straight monthly declines in the gauge. The German economy, Europe’s largest, grew 0.1 percent in the first quarter after a 0.7 percent contraction in the final three months of 2012 as an unusually long winter damped construction and investment.
The U.S. will release data on April orders for durable goods.
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