Kuroda Surprises With Stimulus Boost as Japan Struggles

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Japan Inflation
Pedestrians and shoppers cross a road in the Ginza district of Tokyo. Slowing inflation highlights headwinds to Japan’s economy that’s prompting officials to consider new language on prices and a cut to growth estimates. Photographer: Tomohiro Ohsumi/Bloomberg

Bank of Japan Governor Haruhiko Kuroda led a divided board to expand what was already an unprecedentedly large monetary-stimulus program, boosting stocks and sending the yen tumbling.

Kuroda, 70, and four of his eight fellow board members voted to raise the BOJ’s annual target for enlarging the monetary base to 80 trillion yen ($724 billion), up from 60 to 70 trillion yen, the central bank said. An increase was foreseen by just three of 32 analysts surveyed by Bloomberg News. The BOJ also cut its forecasts for inflation and growth in Japan, the world’s third-biggest economy.

Facing projections for failure to reach the BOJ’s 2 percent inflation target in about two years, and with the pressure from a higher sales tax, enlarging the stimulus at some point had been anticipated by analysts for months. Kuroda opted not to telegraph his intentions in recent weeks, leaving today’s move a surprise -- sending the Nikkei 225 Stock Average to the highest level since 2007.

“It was great timing for Kuroda,” said Takeshi Minami, Tokyo-based chief economist at Norinchukin Research Institute, one of two who correctly forecast today’s easing. Minami noted that it follows the Federal Reserve’s ending of quantitative easing, helping highlight the differing paths for the U.S. and Japan, which has the heaviest debt burden of any country. The yen sank 2.1 percent against the dollar to 111.55 as of 6:02 p.m. in Tokyo.

Today’s decision comes almost 19 months after Kuroda unleashed his initial asset-purchase plan, with the intention of doubling the monetary base. That move similarly drove up stocks and undercut the yen. Since then, a more competitive exchange rate has triggered higher corporate earnings, and asset-price gains have expanded Japanese households’ net worth.

Economy’s Struggle

Just hours after the BOJ’s move, the Government Pension Investment Fund said that it will put half its holdings in local and foreign stocks and start investing in alternative assets as it seeks higher returns.

The 127.3 trillion yen GPIF is the world’s largest pension fund. Its previous strategy was designed on the assumption that deflation would continue, GPIF President Takahiro Mitani told reporters today.

What the BOJ’s program has failed to do as yet is lift exports past their peak, or generate enough of an impact on inflation that the BOJ’s 2 percent target was forecast to be in reach. Instead, consumer prices -- stripping out the impact of an April sales-tax increase -- are rising closer to a 1 percent rate.

Tax Consideration

Also at issue: Prime Minister Shinzo Abe is considering whether to go ahead with a second stage for raising the sales tax. The levy went to 8 percent from 5 percent this year, tipping the economy into the deepest contraction in more than five years. A further bump is scheduled for October 2015, to 10 percent.

“Kuroda couldn’t be bullish anymore -- inflation has slowed to 1 percent and oil prices are going to weigh on prices,” said Minami at Norinchukin. “Kuroda also thought about Abe’s decision on the sales tax. He really didn’t want Abe to postpone it.”

BOJ officials have warned against failing to move ahead with the sales-tax bump out of concern that it would damage confidence in the fiscal sustainability of Japan, the world’s most-indebted nation.

The BOJ said it was aiming to pre-empt any risk of a delay in ending Japan’s “deflationary mindset.” A decline in demand following the April tax increase and the drop in oil prices are putting downward pressure on prices, the bank said.

The BOJ will continue easing as long as needed to achieve stable 2 percent inflation, the statement said.

Household Spending

Today’s decision came hours after a government report showed that inflation eased to the slowest pace in six months in September. Other data showed that household spending fell 5.6 percent in September from a year earlier, while the jobless rate rose to 3.6 percent from 3.5 percent.

Updating its economic projections, the BOJ today reduced its estimate for the core consumer price index, which excludes fresh food, to 1.7 percent for the fiscal year through March 2016, from 1.9 percent in July. For 2016, the bank kept its forecast at 2.1 percent.

Undercutting the outlook for prices has been a falling price for oil. The price of Dubai crude -- a benchmark for Middle East supply to Asia -- has fallen about 24 percent from this year’s peak in June as of Oct. 29. The 10-year break-even rate, a gauge for inflation expectations in bond market, dropped to 1.039 percentage point this week, the lowest since January 2014.

The bank will purchase exchange-traded funds so their amounts outstanding increase by about 3 trillion yen a year, it said. Japanese real estate investment trusts will be purchased with a view to raising their amounts outstanding by about 90 billion yen annually, according to the bank.

The average remaining maturity of the BOJ’s purchases of Japanese government bonds will increase to about seven to 10 years, three years longer than previously.

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