An emerging debate over authorizing the Bank of Japan to buy foreign-currency bonds may spur the central bank to take alternative stimulus action next week, as board members seek to forestall an option they have opposed.
Seiji Maehara, the policy chief of Japan’s ruling party, yesterday said it was “desirable” for the government and BOJ to reach a deal allowing purchases of foreign securities. A former BOJ deputy governor has advocated a 50 trillion yen ($640 billion) initiative to combat the yen’s gains through foreign-debt buying.
Governor Masaaki Shirakawa is among BOJ officials who have opposed the idea, which would challenge the bank to identify appropriate foreign assets and manage the domestic liquidity that would result. The BOJ has instead focused asset purchases on Japanese government bonds and a limited amount of other items, including real-estate investment trusts and exchange-traded funds. The BOJ next meets Aug. 8-9.
“Political calls on the BOJ to help curb the yen’s strength are gaining momentum,” said Chotaro Morita, a fixed-income strategist at Barclays Plc in Tokyo. “Should politicians’ calls for such foreign debt-buying intensify, the BOJ may be forced to seek some other monetary stimulus step as an alternative.”
With interest rates near zero, the asset-purchase program is the bank’s main policy tool for fighting deflation and stimulating the economy. Shirakawa hasn’t clearly stated his view on the effectiveness of buying foreign bonds as part of this program. Such a policy would be aimed at easing yen appreciation and currency intervention is the jurisdiction of the finance minister, Shirakawa said at a news conference on May 23.
“Leaving aside whether this policy is right or wrong, it can be done even now by using the foreign reserves special accounts,” Shirakawa said at the press conference. “Whether its right or not to implement this policy is for the government to decide.”
Takehiro Sato, a former economist at Morgan Stanley who joined the BOJ board last month, said July 24 that buying foreign bonds is one option for the central bank. Takahide Kiuchi, a fellow newcomer to the board, said the same day that the bank may need to consider “new forms of monetary easing.”
Finance Minister Jun Azumi said in parliament this week that currency intervention should be handled exclusively by the minister and it was inappropriate for the bank to engage in intervention-style bond buying.
“It probably won’t be easy to push through the idea, it needs negotiation and adjustments with the MOF,” said Kohei Okazaki, an economist at Nomura Securities Co. in Tokyo. “It will be difficult for the BOJ to buy the considerable amount of foreign bonds that would provide an impact similar to a currency intervention to weaken the yen.”
The BOJ gathering is one of several central bank meetings in Asia next week, with Indonesia, South Korea and Australia also set to decide on interest rates. Economic data from the region have added to evidence of a slowdown, with an official report today showing that China’s services industry expanded at a slower pace in July.
Services purchasing manager indexes are also scheduled to be released for European nations and the U.S. The European Union’s statistics office may say retail sales fell in June, economists surveyed by Bloomberg predict.
The U.S. Labor Department may say payrolls rose by 100,000 in July, following an 80,000 gain the month before, according to a Bloomberg survey. The unemployment rate held at 8.2 percent last month, the report may show.
The strength of the Japanese currency is adding to manufacturers’ woes. Sharp Corp. said yesterday that it will cut 5,000 jobs after widening its annual loss forecast as demand for televisions slumped. Sony Corp. and Panasonic Corp. are also planning to eliminate workers following record losses.
Kazumasa Iwata, a former deputy governor of the BOJ and currently president of the Japan Center for Economic Research, said in a Jan. 25 interview that even companies like Toyota Motor Corp., which has built up a tolerance to an appreciating currency over the years, have been “screaming” about the yen.
The yen traded at 78.18 per dollar as of 2:20 p.m. in Tokyo today, up almost 7 percent since mid-March. The currency reached a postwar high of 75.35 in October and strengthened to an 11-year high against the euro this month.
One of the central bank’s key monetary-policy tools, an asset-purchase program, is encountering difficulties because the BOJ wants to buy more Japanese government bonds than holders of the securities are prepared to sell. The latest failure to meet its purchase targets was on Aug. 1.
“We want to proceed with asset purchases steadily and surely while examining whether yesterday’s failure to attract enough bids will continue or whether that’s something we can address by the creative management of the operation,” BOJ board member Yoshihisa Morimoto told reporters in Kanazawa yesterday.