Kuroda's Confidence in Japan Means Bank of Japan Retains Power to Surprise

  • Bank of Japan is looking past current impact of oil prices
  • Governor sees differences from last year when BOJ eased

Bank of Japan Governor Haruhiko Kuroda’s repeated expressions of confidence in Japan’s economic prospects Wednesday offered little case for added stimulus when the BOJ meets again in three weeks.

Haruhiko Kuroda, governor of the Bank of Japan, speaks during a news conference on Oct. 7.
Haruhiko Kuroda, governor of the Bank of Japan, speaks during a news conference on Oct. 7.
Photographer: Junko Kimura-Matsumoto/Bloomberg

That may be just what he intended, according to Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who previously worked at the central bank. “The next meeting is very crucial -- Kuroda’s main objective was to maintain some room for the freedom to act on the 30th of October.”

Holding off on Wednesday on stepping up monetary expansion also gave more time to Japanese officials to assess what their counterparts at the Federal Reserve are planning. The BOJ, along with central banks around the world, has yet to see how global markets will react to an eventual Fed rate increase. One risk: any exodus of capital out of emerging markets that drives up the yen as a haven could impair a record run for Japanese corporate profits.

Kuroda, speaking at a press conference, underscored that the BOJ would ease without hesitation if needed to secure its 2 percent inflation target. Yet he drew a distinction between conditions now and a year ago, when he led a divided board to expand its record asset-purchase program.

Asked about a comparison with 2014, when -- as now -- measures of inflation expectations in the bond market were falling, Kuroda said that the consumer price trend is different. Japan’s consumer price trends are improving, companies see prices rising and households continue to anticipate inflation, he said.

“The BOJ doesn’t want to take action hastily, before watching how the current slowdown in the global and Japanese economies turns out," said Mari Iwashita, chief market economist at SMBC Friend Securities Co. in Tokyo. Policy makers may also want to hold off adding to their already large bond purchases because “it’s becoming clear that they have to continue this program for a long time,” she said.

While the BOJ was almost universally projected to keep policy unchanged on Wednesday, an increasing number of forecasters in recent weeks have said a move may come on Oct. 30. That’s when the BOJ sets policy after updating its growth and inflation estimates, which may need to be lowered to take account of recent weak data.

Kuroda highlighted positive signs in the economy after some economists estimated that gross domestic product shrank last quarter for a second straight period, putting Japan into a textbook recession. Domestic demand is robust, business investment plans are strong and there’s a good environment emerging for wage gains, he said.

Distant target

Indeed, Japan’s price trends are little different from those of other developed economies, and the nation has lost its outlier status under Kuroda’s monetary expansion since he took office in March 2013. Even so, with all inflation measures distant from the BOJ’s 2 percent target, calls remain for further action.

Kozo Yamamoto, a senior ruling-party lawmaker who has advised Prime Minister Shinzo Abe, on Wednesday reiterated his assessment that further BOJ stimulus was needed. He told reporters in Tokyo that the central bank may be worried that more easing would weaken the yen, which could bring suffering for low-income households.

More data

The BOJ should have a clearer picture of the third quarter by the time policy makers meet on Oct. 30, with monthly figures including September industrial output, retail sales and trade. One indicator Thursday showed a contrast from Kuroda’s confidence in business investment plans. The average value of machine orders, a gauge of strength for capital spending, dropped 3.4 percent in the three months through August from the previous three months.

The core of Kuroda’s stimulus program is the central bank’s purchases of Japanese government bonds, which is the main tool to expand the monetary base at an annual pace of about 80 trillion yen ($667 billion).

While leaving quantitative and qualitative policy unchanged, the BOJ made minor adjustments to collateral requirements for financial institutions seeking funds through various central bank lending programs.

Kuroda said he wasn’t considering cutting the 0.1 percent interest rate on excess reserves and that there was “no chance” he would change his mind on this in the near future.

“From examining various data, I think the state of deflation is over but we are still a half way as far as our 2 percent target is concerned,” said Kuroda. “The inflation trend is surely improving.”

Three additional weeks until the next BOJ meeting will allow further deliberation on the board should there be divisions among the members, said Kanno at JPMorgan. The extra time would also allow consultation with the Abe administration, he said.

Japan’s government has just participated in the U.S.-led Trans-Pacific Partnership trade deal, where there were discussions about currency manipulation. Should the BOJ want to ease policy -- something that could cause the yen to weaken -- it may want to consult ahead of time with the Abe administration, Kanno said.

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