BOJ’s Kuroda Faces One-Year Window on Ending DeflationToru Fujioka and Masahiro Hidaka
Bank of Japan Governor Haruhiko Kuroda gave himself two years to do “whatever it takes” to end deflation and revive the world’s third-largest economy. He may have less than half that time to produce results.
Kuroda needs price rises in six to 12 months or the market may lose confidence in his ability to reach a 2 percent inflation target by 2015, say Goldman Sachs Group Inc. and JPMorgan Chase & Co. The BOJ will boost monthly bond purchases by about 50 percent to 5.2 trillion yen ($55.7 billion) at a two-day meeting starting today, according to the median forecast in a survey of economists by Bloomberg News.
Pressure for results is growing amid doubts from economists and ex-BOJ officials over whether Kuroda can meet his deadline. At stake is the credibility of Prime Minister Shinzo Abe’s economic program -- dubbed Abenomics -- after expectations for more easing sent the yen more than 16 percent lower against the dollar in the last six months and stocks to a 4 1/2 year high.
“Kuroda doesn’t have two years,” said Masamichi Adachi, senior economist at JPMorgan in Tokyo and a former BOJ official. “He has to show that inflation is approaching 1 percent in at least a year, and if he can’t do that then the power of Abenomics will be in doubt.”
Japan’s core prices have fallen in 19 of 26 months through February, and analysts surveyed by Bloomberg see a rise of 0.5 percent in one year. Prices excluding fresh food haven’t risen 2 percent for any year since 1997, when a sales tax was increased.
The yen was 0.1 percent higher at 93.37 per dollar as of 4:16 p.m. in Tokyo, after rising past 93 per dollar for the first time in a month yesterday. The Nikkei 225 Stock Average snapped a two-day decline, closing up 3 percent.
Kuroda, who said yesterday that bold action is necessary to meet expectations, has indicated that expanded purchases of government bonds will be the main tool for easing. Yields on 10-and 20-year bonds fell to near decade lows on March 26.
The bank currently buys debt with maturities of as long as three years, as well as exchange-traded funds and other securities in an asset-purchase program for monetary easing. Outright monthly purchases of government bonds were an average 3.4 trillion yen in the first three months of this year, according to data compiled by Bloomberg.
Kuroda has said the bank will consider combining monthly purchases and an asset-purchase fund, as well as buying more debt with longer maturities. He has also suggested the bank will bring forward open-ended purchases planned for 2014.
Setting a target for the size of the balance sheet is another policy shift being considered, people familiar with the central bank’s discussions said last week.
Japanese lawmakers will vote on Kuroda’s selection as central bank governor for a second time on April 5. Kuroda was confirmed by both houses of parliament last month to serve through April 8 in the final weeks of predecessor Masaaki Shirakawa’s term, and a second approval is needed for a full five-year period.
Atsushi Mizuno, a former BOJ board member, said in an interview last month that more bond purchases risk a market bubble. Kazumasa Iwata, a former BOJ deputy governor, said in an interview on March 26 that Kuroda’s two-year deadline is impossible.
Even Abe said yesterday that the BOJ shouldn’t pursue a 2 percent inflation target “at all costs” and may fail to achieve it should global conditions change.
If Kuroda can’t reach the inflation target and can’t explain this failure, both he and Deputy Governor Kikuo Iwata should resign, ruling party lawmaker Kozo Yamamoto said today in Tokyo. Abe said yesterday in parliament that Yamamoto is an influence on his thinking on monetary policy.
Kuroda’s window for success may narrow if stimulus is delayed until the BOJ’s second scheduled policy meeting this month, a possibility seen by Goldman Sachs.
“They are likely to introduce the reforms in stages because of serious time constraints and the difficulty to debate the issues fully with board members,” Naohiko Baba, Goldman Sachs’s chief Japan economist in Tokyo, wrote in a research report on March 29.
All 19 economists surveyed see the central bank taking action at the meeting this week. Eleven gave numerical forecasts for expanded monthly bond purchases, while four didn’t give an amount. Two expect the BOJ to delay some easing measures until April 26. Two didn’t say whether the BOJ would expand monthly bond purchases.
“The market is impatient but Kuroda should be able to maintain expectations,” said Masayuki Kichikawa, chief Japan economist at Bank of America Corp. in Tokyo. “As long as Kuroda shows he is willing to add stimulus, investors won’t be significantly disappointed.”
The yen’s fall is already working on sentiment. Toyota Motor Corp. agreed last month to pay its employees in Japan the biggest bonus in five years and Kubota Corp., a tractor maker, predicts record sales.
Household sentiment on the economic outlook in a year’s time rose to a record high last quarter, BOJ data showed this week, while the percentage saying they expect prices to rise in one year was the highest since September 2008.
Still, confidence among big manufacturers in a separate BOJ survey improved by less than economists estimated, bolstering the case for Kuroda to expand stimulus this week.
Elsewhere in the Asia-Pacific region, Thailand will leave its benchmark interest rate unchanged at 2.75 percent for a fourth meeting today, according to 20 out of 21 economists surveyed by Bloomberg. Australia posted a smaller-than-expected trade deficit for February.
Data in Europe may show that consumer prices in the euro area rose 1.6 percent in March from a year earlier, according to the median estimate of 44 economists in a Bloomberg survey, down from 1.8 percent in February. In the U.S., a private report may show companies added 200,000 workers in March after a 198,000 gain in February.
The yen’s decline is already swelling the import bill in Japan as nuclear-plant shutdowns force increased inbound shipments of fossil fuels. Exports fell 2.9 percent from a year earlier in February, while imports surged 11.9 percent.
Economy Minister Akira Amari said this week that economic growth should be able to absorb some of a weaker yen’s undesirable effects. Goldman Sachs on March 18 raised its growth forecast for this fiscal year to 2.3 percent from 2.1 percent.
Japan’s sales tax is set to increase to 8 percent in April 2014 and 10 percent in October 2015 from the current 5 percent. Kuroda said last week he aims for 2 percent inflation excluding the impact of the tax rise.