Strengthening Yen Leaves Kuroda Facing More Radical Options

  • Credit Agricole joins those forecasting action in April
  • The yen's gains and plunge in stocks are hurting Japan

The surging yen and slumping stocks are increasing pressure on the Bank of Japan to add to monetary stimulus, less than three months after Governor Haruhiko Kuroda bolstered his arsenal with a negative interest-rate.

QuickTake Abenomics

The currency is back where it was before Kuroda expanded his record asset-purchase program in October 2014 and Japanese shares are falling as foreign investors head for the exit. With a weak yen and buoyant stocks two of the most tangible results of Kuroda’s reflationary campaign, speculation is rising that he needs to take action at the next policy meeting on April 27-28.

The stakes are rising, with data out Tuesday showing that Japanese loan growth slowed to the weakest in three years in March, and some experts predicting the yen has further to rally.  Eisuke Sakakibara, the former finance ministry official dubbed Mr. Yen, said the currency may push all the way to 100 per dollar this year.

Economists are divided on what form more stimulus may take, with suggestions ranging from a bigger cut to the negative rate to more purchases of government bonds, a deeper dive into shares and even radical ideas like "helicopter money." This fourth, untested proposition, would have the government sell short-term debt straight to the BOJ for newly printed money that’s then injected straight into the economy via tax cuts or spending programs.

Here are some of the pros and cons of these four options:

1. Bond Purchases

Pros: This is still the mainstay of Kuroda’s efforts and proved an early success in getting inflation, the yen and stocks all moving in the right direction for Japan. The nation is home to the world’s second largest public debt market and the BOJ governor maintains there is still plenty of scope for more central bank purchases.

Cons: Investors complain that the BOJ’s purchases and negative rate have already combined to "exhaust" the market, drying up liquidity and fueling volatility. While Kuroda wants to drive borrowing costs down, the dominance of negative yields raises questions about whether Japan still has a properly functioning market. Doubling down would exacerbate these issues, bring forward the day when the bank runs out of debt to buy and make the bank’s eventual exit more difficult. Former board member Sayuri Shirai estimates the limits of bond buying may come within two years.

2. Negative rates

Pros: A rate cut directly impacts the cost of borrowing, making it cheaper for people and companies to get cash. The announcement of the negative rate in January had the immediate effect the BOJ was aiming for -- pushing down interest rates. Cutting it again might also weaken the currency, or at least prevent it from strengthening further. Kuroda has said it could theoretically go as low as minus 0.5 percent, and Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group, notes that an exit from negative rates may be easier than from an asset-purchase program. This is particularly sensitive now, with Japan set to play host to Group of Seven nation leaders in May.

Cons: A further cut in the rate would exacerbate the problems the negative rate is causing, with money market funds shutting and bank profits and stock prices under threat. Corporate and household confidence worsened after the new policy. On top of the economic risks, doing more in this area ahead of elections this summer could be unpopular with lawmakers.

3. Risk assets

Pros: Increasing the purchase of exchange traded funds could bring positive sentiment back to the stock market after the benchmark Topix index’s 17 percent slump this year. HSBC Japan economist Izumi Devalier says the central bank may soon unveil an ambitious equity buying program, raising its annual purchases from 3 trillion yen ($28 billion) all the way to 13 trillion yen. Credit Agricole’s Kazuhiko Ogata also sees more ETF purchases on the agenda, which he said would be less likely to draw criticism from other nation’s concerned about currency manipulation.

Cons: The BOJ held about 54 percent of ETF’s at the end of September, according to the bank. The expansion of ETF buying would raise concerns that the BOJ is distorting Japan’s stock markets. More buys of ETFs would expose the BOJ to the risk of harming its balance sheet, especially when Japanese stocks are tumbling.

4. "Helicopter Money"

Pros: The bank could take advantage of the super-low yields it has created to allow the government to borrow more money and spend it to support the economy. Ruling party lawmaker Toshihiro Nikai proposed the government to make full use of interest rates effectively at zero to issue bonds for economic stimulus, without mentioning the BOJ. His enthusiasm doesn’t appear to have spread among lawmakers at this point.

Cons: This would further add to Japan’s debt burden, which is already the largest in the world as a percentage of GDP. Currently, the nation owes the equivalent of more than 8 million yen per person. This would also call into question the independence and credibility of the BOJ, with it acting as a financing arm of the government. Critics of helicopter money say churning out cash could eventually mean Weimar-style runaway inflation for countries that try it.

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