BOJ Keeps Policy Unchanged Even as Kuroda Warns on Yen

Kuroda Keeps Policy Unchanged Ahead of Election
  • Kuroda holds off ahead of Japan election, U.K. vote on Brexit
  • Majority of economists see central bank moving at next meeting

The Bank of Japan refrained from expanding monetary stimulus ahead of the U.K. vote on Brexit next week that could roil global markets, and before a domestic election in which the political opposition has made the bank’s negative interest-rate policy an issue.

QuickTake Abenomics

With the yen soaring to its strongest in almost two years after the decision Thursday, Governor Haruhiko Kuroda reiterated in a press conference in Tokyo that the central bank won’t hesitate to take action if needed. He also said the central bank was carefully monitoring moves in financial markets and was in touch with counterparts including the Bank of England, amid Brexit concerns that he said had had an impact in the bond market. Japan’s bond yields slid to record lows amid demand for haven assets.

Haruhiko Kuroda on June 16.
Haruhiko Kuroda on June 16.
Photographer: Kiyoshi Ota/Bloomberg

The governor also reiterated his expectation for inflation to hit policy makers’ 2 percent target as forecast in the fiscal year through March 2018, saying Japan’s economy continues to expand gradually and citing solid plans for business investment. Even so, he said "I’m well aware if the yen rises excessively, it could well have a big impact on inflation pace."

Watching Yen

“Speaking of the strengthening yen, we think it’s not favorable that the yen rises and volatility increases without reflecting economic fundamentals," Kuroda said after the yen climbed through 104 per dollar for the first time since 2014. "We want to carefully watch and pay attention to the international financial market, including the foreign exchange.” He reiterated his position that "we don’t decide monetary policy based on currency moves."

The BOJ earlier held its key interest rate at minus 0.1 percent and kept the annual target for expanding the monetary base at 80 trillion yen ($764 billion). About 28 percent of economists in a Bloomberg survey had forecast additional easing at this meeting, with 55 percent looking to the next gathering July 28-29, when the BOJ will update its inflation projections.

By holding off on further expansion now, Kuroda can better watch the impact of Britain’s vote, see the outcome of a Japanese upper house election on July 10 and consider the path of U.S. monetary policy. The governor declined to comment on the possibility of an unscheduled BOJ meeting ahead of the next meeting.

Brexit Danger

“The BOJ will have to take bold action to arrest the strengthening yen and if it tries something in line with what it did before, there’ll be disappointment," said Takeshi Minami, chief economist at Norinchukin Research Institute. “With the Brexit vote ahead, the BOJ couldn’t move this time because the result on June 23 may erase the impact of whatever it did now.”

The yen has now surged more than 15 percent this year, even with the introduction of negative rates. The Topix stocks index closed down 2.8 percent.

If the U.K. votes for Brexit, the Japanese currency may gain as much as 6 yen per dollar and while the Nikkei 225 Stock Average could drop by 3,000, according to a report by Mizuho Research Institute earlier this month.

“The Bank of Japan is closely exchanging opinions with the Bank of England and other central banks and so forth," Kuroda said. "We want to coordinate closely with domestic and overseas authorities and carefully watch how the vote will affect international financial markets and the global economy, including Japan."

The BOJ’s immediate outlook for inflation deteriorated, something that’s sure to reinforce expectations for board members to trim their projections when they update these at the July meeting. Thursday’s statement said the year-on-year change in consumer prices is "likely to be slightly negative or about 0 percent for the time being." In April, the BOJ said it is "likely to be about 0 percent for the time being."

Pressure has been rising for Kuroda to bolster stimulus soon given tepid economic growth and inflation nowhere near its 2 percent inflation goal. Data since the April meeting show core consumer prices falling 0.3 percent while a BOJ inflation gauge that excludes fresh food and energy slowed to 0.9 percent. A slight rebound in gross domestic product in the first quarter provided little optimism for inflationary pressure, with weak private consumption and business investment contracting.

With the risk of further declines in consumer spending, Prime Minister Shinzo Abe on June 1 postponed raising the sales tax to 2019 from 2017 after the previous hike in 2014 sent the economy into a recession.

Analysts in the Bloomberg survey said that when the BOJ does adjust policy, they see increased purchases of exchange-traded funds and a deeper cut to negative interest rates as the two most likely actions.

“They missed a chance to surprise markets and make a big impact with additional stimulus,” said Hiroshi Miyazaki, an economist at Mitsubishi UFJ Morgan Stanley, who expected further easing.

Going into a fourth year of Kuroda’s record stimulus, BOJ’s balance sheet swelled to 81 percent of the nation’s GDP at the end of March, far larger than 25 percent for the U.S. Federal Reserve and 28 percent for the European Central Bank, according to a BOJ report on June 3.

The Bank of Tokyo-Mitsubishi UFJ Ltd. is considering dropping out as one of 22 primary dealers of government bonds, providing the latest sign of stress in a debt market that has struggled to cope with the unprecedented monetary stimulus and the advent of negative rates.

“It is my sincere hope that the bank will conduct monetary policy flexibly under the flexible price stability target while obtaining a better understanding by the market,” Takehiro Sato, a BOJ board member who dissented in the two votes to expand stimulus, said on June 2.

For his part, Kuroda Thursday said the BOJ is closely watching liquidity in the bond market, saying that its debt purchases have been smooth so far and that he didn’t see an approaching limit to the buying. Asked about 10-year government bond yields reaching minus 0.2 percent, he cited the impact of concerns about Brexit.

“In terms of a trend, our quantitative and qualitative monetary easing has pushed down yields from short-term to long-term. But behind the recent plunge of the 10-year yield is the so-called Brexit vote. That’s making international financial markets somewhat unstable, spreading the impact to the JGB market as well as the German sovereign debt market.”

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