Fistful of Reasons Why BOJ's Kuroda May Avoid Expanding Stimulus

  • Five charts show why BOJ pausing as job market recovers
  • Just over half of economists see no extra easing this month

Bank of Japan Governor Haruhiko Kuroda has a fistful of reasons to believe he can revive inflation from below zero and hold off on additional monetary easing this month.

Kuroda said last week the decline in the consumer-price index was due to a drop in oil and the price trend has been improving steadily. He can also point to the tightest labor market since the bubble years, bond yields near record lows, the yen trading within 5 percent of its weakest versus the dollar since 2002, and the risk of bankruptcies should the currency drop too fast.

Record corporate profits have been slow to translate into higher wages in the world’s third-biggest economy, which means policy makers need to be careful about relying too heavily on driving up living costs to revive inflation. Economists are divided with 17 of 36 surveyed by Bloomberg forecasting the BOJ will act by the Oct. 30 policy meeting, including two who expect a move on Wednesday.

“The economic scenario that the Bank of Japan has been touting is still intact,” said Kazuto Doi, a Tokyo-based fund manager at Western Asset Management, which oversaw $452.5 billion as of the end of June. “An expansion of stimulus now risks being counterproductive, because pushing up prices with a weaker yen while wages aren’t growing would pour cold water on consumer spending.”

The following five charts show why additional easing may not be necessary now, or could even endanger the recovery:

Chart 1: While the BOJ’s favored measure of inflation turned negative in August for the first time since April 2013 -- the month that Kuroda started unprecedented stimulus -- expenses including food, clothing and education are growing as much as four times faster than wages. Reaching a deal on Pacific trade pact is seen helping cut food costs for Japanese consumers, who depend on imports for about 60 percent of what they eat.

Chart 2: The tightest job market since the height of the bubble era suggests the pressure for higher wages is building. Job seekers now have the most choice since 1992. The jobless rate is also hovering near the lowest since 1997 at 3.4 percent.

Chart 3: The yen is settling into a range centered broadly on a rate of 120 per dollar, roughly halfway between the extremes known among some investors as the Kuroda put and the Kuroda line. Some in the market speculate that if the Japanese currency strengthens back to 115 per dollar, it will trigger additional BOJ stimulus to keep the 2 percent price target in view. At the same time, the 125 level is seen by some as too weak for policy makers, as that’s around where it was trading when the central bank governor said it was “unlikely to weaken further in real effective terms,” spurring the biggest rally in three months.

Chart 4: The danger of a weak yen is readily apparent in the growing number of bankruptcies it has caused, mainly among small- and medium-sized enterprises that need to pay more to buy imported goods. The Japanese currency has weakened about 35 percent against the dollar in the past three years, the most among its developed-market counterparts. There were 231 corporate failures due to the exchange rate in the first half of this year, more than five times the number two years earlier, according to credit research firm Teikoku Databank Ltd.

Chart 5: Another reason Kuroda may feel he can sit on his hands is that bond yields have been sliding since June without additional stimulus. Worldwide, only Swiss sovereign debt has lower yields. The benchmark 10-year Japanese government bond yielded 0.325 percent on Tuesday in Tokyo, down from as high as 0.545 percent in June, and approaching the record-low 0.195 percent in January.

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