Kuroda Waits for Markets to Adapt Before Adding Stimulus

Does BOJ Have the Tools to Provide Further Easing?
  • Kuroda says previous QE had impact; negative rate will too
  • BOJ runs into operational issues with unprecendented stimulus

Bank of Japan Governor Haruhiko Kuroda declined to follow his European counterpart in calling time on interest-rate cuts, leaving his options open as the economy struggles for traction.

While the BOJ kept policy unchanged on Tuesday, Kuroda underscored in a press conference a readiness to move on any of three fronts: a reduction in the minus 0.1 percent key rate, an acceleration in boosting the monetary base or an expansion in purchases of riskier assets. Questioned by a lawmaker at parliament Wednesday about the scope for lowering the rate to minus 0.5 percent in the event of a major shock, he agreed there was theoretical room to do so.

Haruhiko Kuroda on March 15.
Haruhiko Kuroda on March 15.
Photographer: Kiyoshi Ota/Bloomberg

Kuroda indicated that financial markets need to finish adjusting to the new negative rate, which has seen money-market funds shutter and caused challenges with computer systems unaccustomed to negative rates.

"We need to carefully monitor spillovers," from the three-pronged strategy, Kuroda said. He acknowledged that some institutions weren’t prepared for the Jan. 29 announcement of negative rates on a portion of the cash financial institutions park at the BOJ, adding that just as the central bank’s asset purchases had a positive impact on the real economy, the addition of a negative rate will do so as well, though "it will take some time," Kuroda said. On Wednesday at the Diet, he said the effect could take quite some time to appear.

Rate-cut Option

"As time goes on, if the market adjusts, then I think a rate cut could be one of the options," said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who previously worked at the central bank. "The BOJ fully understands this is totally unprecedented and it takes time for financial institutions and market participants to understand what it means."

Yen Also Rises

The yen rose after the BOJ’s announcement as some investors highlighted an omission in the policy statement of language from January that it will cut the key rate "further into negative territory if judged as necessary." When asked about the tweak, Kuroda said the BOJ’s thinking is unchanged.

Kuroda also drew a contrast with European Central Bank President Mario Draghi, who last week said "we don’t anticipate it will be necessary to reduce rates further." The ECB’s deposit facility rate is minus 0.4 percent, whereas Japan’s rate is just minus 0.1 percent, the BOJ governor noted. He also highlighted the solidity of Japan’s banks.

With Japan’s inflation rate lingering at zero percent and gross domestic product in danger of a second straight quarterly contraction in January-to-March, most analysts surveyed by Bloomberg ahead of Tuesday’s meeting saw further BOJ action as likely in coming months.

At their April 27-28 meeting, BOJ board members will update their economic projections, potentially giving them reason to adjust policy. With the negative-rate framework proving unpopular with segments of the public, a looming election due by the end of July may provide political reason to hold off until the July 28-29 gathering. The BOJ also meets June 15-16.

Meantime, the Abe administration is mulling its fiscal strategy in the run-up to the upper-house election. The prime minister and Kuroda today participated in a panel on the global economic outlook where Nobel laureate Joseph Stiglitz advised against proceeding with a 2017 sales-tax increase. Paul Krugman, who helped convince Abe in 2014 to postpone the increase that was originally scheduled for 2015, will speak at a similar panel next week.

"Japan has had a very strong monetary policy and stimulated the economy but there are limits, therefore the focus should be on fiscal policy," Stiglitz told reporters.

Kanno, for his part, sees the BOJ moving in July on all three of its fronts, with a cut in the key rate to minus 0.3 percent, an expansion in the annual target for boosting the monetary base to 100 trillion yen ($885 billion) from 80 trillion yen, and increased purchases of exchange-traded funds and real-estate investment trusts. The monetary base is increased mainly through government bond buying.

The BOJ exempted money reserve funds from the negative rate as it irons out kinks in its new policy and seeks to placate some institutional investors who are unhappy with the measure.

"By dealing with some of the technical problems created by its initial experiment with negative rates, the BOJ may be clearing the way for a deeper move into negative territory at its April meeting," Bloomberg Intelligence analyst Yuki Masujima wrote in a note.

The challenges that markets have had coping with the negative rate illustrate the operational issues that the BOJ has had to contend with as it continues to strengthen its unprecedented stimulus. In December, the central bank tweaked its framework for buying bonds, ETFs and REITs. The BOJ’s balance sheet is now the equivalent of more than 80 percent of GDP.

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