• Kuroda ordered staff to prepare for Sept. 20-21 deliberations
  • Governor says there won’t be any less emphasis on QE

The Bank of Japan had observers scratching their heads Friday with the announcement that it will mount a “comprehensive” review of its policy framework at its next meeting.

The following points show what’s known, and still unclear, about the assessment at the BOJ’s Sept. 20-21 meeting.

What the BOJ said:

“As shown in the July 2016 Outlook for Economic Activity and Prices (Outlook Report) released today, there is considerable uncertainty over the outlook for prices against the background of uncertainties surrounding overseas economies and global financial markets. Against this backdrop, with a view to achieving the price stability target of 2 percent at the earliest possible time, the bank will conduct a comprehensive assessment of the developments in economic activity and prices under "QQE" and "QQE with a Negative Interest Rate" as well as these policy effects at the next MPM. The Chairman instructed the staff to prepare for deliberations at the next meeting.”

The “outlook report” includes board members’ economic forecasts. The predictions show a slightly lower range among the members for inflation in 2016 and 2017. QQE refers to quantitative and qualitative easing -- Governor Haruhiko Kuroda’s term for his monetary stimulus, which includes expanding the monetary base (the quantitative element) and buying risk assets (the qualitative one).

Who asked for it:

While Kuroda, in the statement, instructed staff to do preparatory work for the September meeting, there’s no details on whether the review was his idea or whether he was responding to calls from his colleagues. Two current board members have consistently voted against the negative rate policy for a portion of commercial bank reserves. More broadly, people familiar with the matter said this month that an increasing number of officials at the BOJ are concerned about the sustainability of the current framework of massive monetary stimulus.

Will the inflation target change?

Not according to Kuroda. While he said at a Tokyo press conference that risks are high for the BOJ’s 2 percent goal for the consumer price index, the purpose of the review is to consider how to hit the target as soon as possible. He underscored that the central bank will discuss what is needed to reach the 2 percent objective. That’s a contrast with the persistent dissenter on the board, Takahide Kiuchi, who favors a “medium to long term” time frame for the 2 percent pace. Kuroda also noted that the 2 percent target was set in a January 2013 joint statement with the government.

Will it mean more easing, or less?

That’s the trillion yen question BOJ watchers and investors will be debating for the next seven weeks-plus.

Kuroda said the review won’t lead to less emphasis on quantitative easing. He stressed in the press conference his view that the BOJ hasn’t come to a limit on its expansionary policy. While the BOJ now holds more than one third of outstanding Japanese government bonds, the governor noted that it doesn’t have two-thirds, and didn’t think purchases have come to a limit. He said that the impact of a further cut in the negative policy rate would be very large, and that there was room for going deeper into negative rates. As always, the BOJ chief said that if needed, further easing would be implemented.

Some analysts see the potential for additional tools, such as purchases of municipal bonds or providing banks with funds for lending at negative rates.

In light of some BOJ officials’ concern over the sustainability of the easing program three years after it began, some say that a more fundamental shift can’t be ruled out. Speaking between the policy statement Friday and Kuroda’s press briefing, Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG, said “it’s possible they stop focusing on increasing the monetary base and instead promise keeping the size of the balance sheet as it will take a while to get to their price goal.”

Bottom line: “We in the market are not quite sure which way he is going to go,” said Robert Feldman, chief economist at Morgan Stanley MUFG Securities Co. in Tokyo. “He has a record of turning on a dime.”

Is this about government coordination?

The review would come amid Diet deliberations of Prime Minister Shinzo Abe’s fiscal package, which he said Wednesday would have a headline value of 28 trillion yen. The BOJ said in Friday’s statement that there will be “synergy effects on the economy” from the bank’s continuing easing and the government’s stimulus package. By the September meeting, the precise measures the Abe administration will be taking will be clear, offering the opportunity of support -- if the review offers something more on the monetary stimulus front.

What next?

Board members will have plenty of opportunity to offer their own perspectives on the review in coming weeks. Deputy Governor Kikuo Iwata is scheduled to speak Aug. 4 in Yokohama, with a press briefing to follow.

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