BOJ Said to Split on Measure to Quell Bond VolatilityToru Fujioka and Masahiro Hidaka
The Bank of Japan is divided over whether to authorize a measure designed to quell bond-market volatility, with some officials concerned it would return the BOJ to a pattern of incremental steps that failed in the past, according to people familiar with the discussions.
At issue is whether the board, which meets June 10-11, should give its financial markets department the power to double the maturity of loans it extends to banks to two years. An opposing view is that the step is a useful backup in case of a spike in fluctuations in the government bond market, the people said, asking not to be named because the talks are private.
The debate reflects the challenge for a central bank trying to persuade investors, businesses and households that its unprecedented monetary stimulus unveiled April 4 will be enough to end Japan’s 15 years of entrenched deflation. A 16 percent decline in the Topix Index from a May 22 high and volatility in bonds, with 10-year yields diving to a record low in April before tripling in May, are hurting confidence that policy makers will succeed in reviving the economy.
“The BOJ is in a very tough position -- it’s going to be interesting to see how it will defend its stance,” said Chotaro Morita, Tokyo-based chief strategist for fixed income at Barclays Plc. “The best solution for now may be to extend the duration to two years and make it clear it’s temporary. The extension would be effective, but market participants would wonder if this is easing” policy in an incremental way, just as before, he said.
Japan bears the world’s biggest public debt burden, with the International Monetary Fund last week calling for a “concrete and credible” plan for fiscal consolidation. The IMF said last year that the nation’s borrowings may amount to 245 percent of its economic output this year.
Also looming at next week’s meeting is the possibility of a decision whether to increase the cap on central bank purchases of real-estate investment trusts. The 138 billion yen ($1.4 billion) effort since December 2010 has been credited with contributing to a resuscitation in the nation’s property market two decades after its post-bubble collapse.
The BOJ’s purchases so far in 2013 amount to 98.7 percent of a self-imposed limit for the year of 140 billion yen. One view among policy makers is that the cap shouldn’t be raised because such a move could be seen as an incremental step, according to people familiar with BOJ discussions. Governor Haruhiko Kuroda, 68, says he will do everything possible to achieve a goal of 2 percent inflation, avoiding “gradualism” or “incremental” efforts.
J-REITs extended declines today after publication of the comments from the people familiar with the BOJ discussions. The Tokyo Stock Exchange REIT index fell 3.7 percent to a three-month low.
“The BOJ can stop purchases of J-REITs for this year once the current target is met as the index is at a reasonable level,” said Yoji Otani, a real estate analyst at Deutsche Bank AG in Tokyo. “The BOJ has helped but the real driver for J-REITs has been signs of an increase in property prices and fewer office vacancies.”
Office vacancies in Tokyo fell for a third straight month in May to the lowest in more than three years, according to a report released today by a Tokyo-based office-brokerage Miki Shoji Co.
Goldman Sachs Group Inc. economist Naohiko Baba said yesterday that the central bank should “urgently” stabilize long-term interest rates, with increases in yields threatening to derail economic gains. Ten-year yields were at 0.835 percent at 3:15 p.m. today in Tokyo, compared with a record low of 0.315 on April 5 and as much as 1 percent on May 23.
In the past two weeks, fluctuations in 10-year yields have diminished, with the rates ranging from 0.964 percent to 0.795 percent according to data compiled by Bloomberg. Some BOJ officials assess that the reduced volatility lessens the need to authorize two-year lending to banks, according to the people.
The BOJ has increased the frequency of its government bond purchases and used extra one-year funding operations -- supplying money against financial institutions’ collateral at the central bank -- as Kuroda tries to avoid “excessive volatility” since the April 4 announcement of a doubling of bond purchases. While the financial-markets division has authority for one-year operations, it would need board approval for two-year funding.
Fifteen of 17 analysts in a Bloomberg News survey either forecast that the BOJ will approve two-year operations at the policy meeting or say that such a move is possible.
Abe, 58, and Kuroda need to sustain the momentum of their campaign, after prospects for expanded easing and a weaker yen sent share prices soaring from November. Mazda Motor Corp., the most export-dependent Japanese car marker, doubled in the past six months. The yen traded at 99.11 per dollar as of 3:11 p.m. in Tokyo today, down about 13 percent this year.
Japanese stocks, including Mazda, tumbled yesterday as Abe said that autumn will be the soonest his government presents legislation for a growth strategy, termed the “third arrow” of Abenomics, accompanying monetary and fiscal stimulus. The Topix Index fell another 1.8 percent today in Tokyo, paring this year’s gain to 24.5 percent. A 6.9 percent decline on May 23 was the biggest since a natural disaster in March 2011.
“If the stock market continues to slump and the yen strengthens, Kuroda is going to be under pressure to ease further,” Izumi Devalier, an economist with HSBC Holdings Plc in Hong Kong, said yesterday. “But he’s been very clear that he’s not going to do piecemeal stimulus and reacting to market moves now would only heighten expectations for more of the same in the future.”
According to HSBC, major additional stimulus is unlikely to be debated by the BOJ before October at the earliest. Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo and a former central bank official, said yesterday that the central bank had only just delivered its “big bang” two months ago, pledging to double the money in the economy over two years.