Kuroda’s April-Was-Enough Message Faces Markets Wanting More

Bank of Japan Governor Haruhiko Kuroda’s conviction his April plan to double the nation’s monetary base will be enough to end deflation is confronting its biggest test with a sustained sell-off in stocks.

The Topix index fell today after dropping 1 percent yesterday, extending its decline to 16 percent from a May 22 high after the BOJ refrained from adding stimulus or expanding its toolkit for tackling volatility in bonds. Kuroda has repeatedly said the BOJ has taken all “necessary” measures.

Prime Minister Shinzo Abe contributed to the retreat in stocks last week by putting off until autumn a structural deregulation program he vows will bolster growth. Politically handicapped from pursuing bolder steps before elections next month, the risk is that lawmakers will step up pressure on Kuroda to address market turmoil through monetary measures.

“Apparently the BOJ considers a stock plunge is temporary, but the central bank would be forced to act if stock prices keep heading south,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo. At the same time, “if a central bank does everything investors call for, it would be pushed into a corner and forced to react endlessly,” he said.

Machine orders fell 8.8 percent in April from March after rising for two months, the Cabinet office said in Tokyo today. The median forecast of 28 economists was for an 8.1 percent drop.

Strengthening Yen

The yen surged after the BOJ decision, touching a high of 95.60 against the dollar yesterday before trading 0.2 percent lower at 9:11 a.m. in Tokyo. 10-year yields were at 0.860 percent today, compared with a record low of 0.315 percent on April 5 and a high of 1 percent on May 23.

Even after a one-day plunge of 6.9 percent on May 23, the Topix is up 25 percent this year. The Topix fell 2.3 percent in Tokyo today, with the Nikkei 225 Stock Average dropping 2.1 percent after falling 1.5 percent yesterday to 13,317.62.

“The Nikkei falling to around 12,000 would be the limit for the government’s patience with the BOJ,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, formerly of Goldman Sachs Group Inc. “The central bank would come under pressure for further measures such as more easing, longer maturities -- some sort of stronger commitment to easing,” he said, referring to purchases of longer-dated debt.

Policy Unchanged

Yesterday’s policy statement restated the April pledge to increase the monetary base by 60 trillion to 70 trillion yen ($726 billion) per year. Policy makers left unaltered a one-year fixed-rate loan facility the bank has tapped seven times since April to try to ease bond market volatility. Twenty of 23 analysts in a Bloomberg News survey forecast that the BOJ would approve loans of two years or longer at yesterday’s meeting or said that such a move was possible.

“We have concluded that we don’t need to have a new tool for now as volatility has been greatly reduced amid our efforts for flexible operations,” Kuroda said at a briefing. “We will discuss when needed” any extension to the funding limit, he said, adding that “I haven’t seen the need for it so far.”

The BOJ has so far offered 13 trillion yen in the one-year fixed-rate operations, with banks and financial institutions taking up a total of 10.4 trillion yen.

Yields matter in Japan because the nation bears the world’s biggest public debt burden, with the International Monetary Fund last month urging a “concrete and credible” plan for fiscal consolidation. The IMF said last year that Japan’s borrowings may amount to 245 percent of its economic output this year.

Debt Burden

“Volatility in the bond market is calming down,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo, and one of the economists who expected no extension of the funding operation.

Price swings in Japan’s government bonds maturing in more than a year have almost halved in the past two months. Volatility has declined to 3.79 percent since it reached 6.86 percent on April 16, the highest since September 2003 on a 10-day reading basis, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The BOJ’s stance “sends a signal that Kuroda won’t be swayed by short-term swings and volatility in bond yields,” said Hideo Kumano, executive chief economist at Dai-ichi Life in Tokyo and a former BOJ official. According to Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo, the central banker also avoided the mixed message of expanding bond-buying options for financial institutions while simultaneously trying to push them into holding riskier assets.

New Loans

Officials before the meeting were divided over whether to extend the loans to a two-year horizon, people familiar with the discussions said last week.

Yesterday, Kuroda said that the central bank has more scope to increase purchases of exchange-traded funds than of Japanese real-estate investment trusts, or J-REITs. The BOJ also said that 3.15 trillion yen of loans will be extended to 70 major and regional banks on June 20 through a program set up under former Governor Masaaki Shirakawa.

The BOJ upgraded its assessment of exports and production, saying both are “picking up,” and also saw some initial progress toward pulling the nation out of 15 years of deflation. Annual consumer-price changes are “likely to gradually turn positive,” the bank said, a switch from saying on May 22 that the benchmark gauge was “expected to register smaller declines for the time being, and thereafter is likely to gradually turn positive.”

The economy is “picking up,” the central bank said, after a revised report this week showed annualized growth of 4.1 percent in the first quarter, the fastest pace in a year.

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