BOJ Cash Seen Catching Fed on Expanded Stimulus: Japan Credit

Photographer: Tomohiro Ohsumi/Bloomberg

Pedestrians walk past the Bank of Japan headquarters in Tokyo. Close

Pedestrians walk past the Bank of Japan headquarters in Tokyo.

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Photographer: Tomohiro Ohsumi/Bloomberg

Pedestrians walk past the Bank of Japan headquarters in Tokyo.

The Bank of Japan will probably boost currency in circulation by more than 50 percent by the end of 2015, catching up with the Federal Reserve, amid forecasts for extra stimulus.

The monetary base will increase to 340 trillion yen ($3.27 trillion) at the end of next year, from 220 trillion yen last month, the median estimate of nine economists in a Bloomberg News survey shows. That would close the gap with the $3.91 trillion in the U.S. as of March. Reserve Bank of Australia Governor Glenn Stevens said last month the BOJ may soon outpace the Fed if it adds to so-called quantitative easing.

Pressure is building on BOJ Governor Haruhiko Kuroda as the first sales-tax increase in 17 years wrecks consumer confidence in the world’s third-largest economy, while sentiment among large manufacturers trails forecasts. Forty-four percent of economists in a separate survey say policy makers, starting a two-day meeting today, will add to easing in July.

“The BOJ will continue with QE and actually increase the pace of expansion of the monetary base,” said Marcel Thieliant, a Singapore-based economist at Capital Economics Ltd. “Each component of its current package will be increased proportionately. The Fed may raise rates a bit more aggressively than what the market is expecting.”

Monetary Base

Capital Economics expects Japan’s monetary base to expand to 370 trillion yen by the end of next year, or $3.56 trillion at current exchange rates, while that of the U.S. will be at $4 trillion. The BOJ is currently conducting money market operations so that the balance will increase at an annual pace of 60-70 trillion yen.

The yen traded at 103.89 against the dollar as of 6:44 p.m. in Tokyo on April 4.

The Tankan index for sentiment among large manufacturers was at 17 in the first quarter from 16 in the previous period, the BOJ report showed April 1, below the median estimate of 19 in a Bloomberg survey of economists. The index is forecast to drop to 8 in June, the lowest in a year, after the sales tax increased to 8 percent from 5 percent on April 1.

Etsuro Honda and Koichi Hamada, economic advisers to Prime Minister Shinzo Abe, said last month that the central bank could decide as soon as May whether additional stimulus measures are necessary.

Stimulus Outlook

On April 4 last year, the BOJ announced plans to buy about 7 trillion yen of government debt a month to achieve a 2 percent price growth target after near-zero interest rates had failed to end 15 years of deflation. The nation’s monetary base will grow to 270 trillion by the end of this year, the bank said at the time. The minutes of its February meeting released last month didn’t include a target for the end of 2015.

“Were the Bank of Japan to step up its current program of quantitative and qualitative easing, it would soon be adding more cash to the global financial system, in absolute terms, than the Federal Reserve,” the RBA’s Stevens said in the text of a speech in Hong Kong on March 26.

The U.S. central bank is printing fewer dollars, as it has cut purchases of sovereign bonds and mortgaged-backed securities to $55 billion a month from $85 billion last year. Fed Chair Janet Yellen said last month U.S. asset purchases may end this fall and borrowing costs could rise in “around six months” after the buying stops.

The BOJ held 183 trillion yen of government debt, or 18.6 percent of the total amount outstanding at the end of December, central bank data show. That compared with 12 percent at the end of 2012 before Kuroda took helm as governor.

Market Expectations

“The market probably expects the BOJ to buy another 50 trillion yen of JGBs, so expansion falling short of that may be seen as tapering,” said Kazuto Doi, a Tokyo-based portfolio manager at Western Asset Management Co., whose company oversees about $451.6 billion globally. “There’s not much incentive for the BOJ to be stingy at present if they know they would eventually have to buy in large amounts. You can get more bang for the buck by being ahead of the curve.”

Doi and 11 percent of the economists in the Bloomberg survey expect additional measures to be rolled out as soon as this month.

BOJ easing is having the intended effect and Japan is smoothly following the path to its inflation target, Kuroda said on April 1. Consumer prices excluding fresh food held at a five-year high of an annual 1.3 percent in February.

Negative Yields

“The BOJ is likely to increase buying of JGBs" and some riskier assets around June, said Kenji Sakaguchi, Tokyo-based chief investment officer of Prudential Investment Management Japan Co. “But given that their impact on the market and inflation will be quite limited, something more may be needed, though it’s unclear what kind of surprise they can provide.”

The 10-year yield was at 0.64 percent on April 4, the lowest globally. The benchmark yield will stay capped at 0.82 percent this year, according to the average forecast of analysts in a Bloomberg survey.

“The BOJ would have to buy bonds at negative yields if they were to significantly increase the monetary base to more than 270 trillion yen,” Ryutaro Kono, the chief Japan economist in Tokyo at BNP Paribas SA, said in a seminar in Tokyo on April 2. “They would end up cutting their own throats.” A negative yield means the BOJ will make a loss by buying government bonds.

“One has to ask what’s really left in the BOJ’s tool box,” Shinji Kunibe, head of fixed income management for foreign bonds at Daiwa SB Investments Ltd., which has about $48 billion in assets, said in an interview in Tokyo on April 2. “Last year was almost too good to be true.”

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Hiroko Komiya in Tokyo at hkomiya1@bloomberg.net

To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net; Sandy Hendry at shendry@bloomberg.net Jonathan Annells, Pavel Alpeyev

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