BOJ Seen Doubling ETF Purchases in Next Round of EasingToru Fujioka and Masahiro Hidaka
Japan’s central bank will probably double purchases of exchange-traded funds in a second round of monetary easing under Governor Haruhiko Kuroda anticipated in coming months, a Bloomberg News survey of economists shows.
The Bank of Japan, which tomorrow is forecast to leave unchanged a 60 trillion yen to 70 trillion yen ($674 billion) target for yearly expansion of the monetary base, will increase annual ETF buys to 2 trillion yen in months ahead, according to a survey of 36 analysts. The bank could boost annual bond purchases by at least 10 trillion yen, with July most favored for a policy move.
While Kuroda pointed to the equivalent of trillions of dollars of financial assets the BOJ could buy before he took the helm in March 2013, the survey signals little change in tactics is likely. Evidence of budding inflation expectations among Japan’s companies may restrain more ambitious plans, such as open-ended ETF purchases, even as the economy slows because of this month’s sales-tax increase.
“Kuroda doesn’t need to move as drastically as in April last year, when he was shifting the economy from deflation,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “By doubling the ETF buys, the BOJ can send a message that it’s there to take action when the economy weakens.”
Unprecedented stimulus that helped weakened the yen 5.5 percent against the dollar over the past year has fueled inflation even as government bond yields remain the world’s lowest, with 10-year debt at 0.64 percent at 10:05 a.m. today in Tokyo.
The yen was little changed at 103.21 against the U.S. currency. The Topix index fell 1.1 percent after a selloff in technology shares sent U.S. markets lower.
The central bank’s benchmark price gauge was at 1.3 percent in February, compared with a target of stable 2 percent inflation, and a BOJ survey last month indicated companies see price gains persisting for at least the next five years, marking an end to 15 years of deflation.
For now, the central bank needs to help steer the economy through the slump in consumption projected to follow the increase in the sales tax to 8 percent from 5 percent on April 1. In expanding stimulus, one challenge for Kuroda would be to avoid any perception that he has returned to the incremental policy steps of predecessor Masaaki Shirakawa. There may also be opposition within the BOJ board to extra stimulus, with board member Takahide Kiuchi saying that negative side-effects may outweigh benefits.
In an interview on Feb. 11 last year, before becoming governor, Kuroda said that the BOJ needed to use “whatever measures are available” to eradicate deflation, adding that the bank could buy the equivalent of trillions of dollars of financial assets. Still, it has held off from seeking some additional tools such as purchases of foreign bonds, a measure advocated by former BOJ Deputy Governor Kazumasa Iwata.
Kuroda is not without his critics. Kunio Okina, a former head of the BOJ’s Institute for Monetary and Economic Studies, has raised concerns that the BOJ is financing government spending.
“The Bank of Japan is making large-scale government bond purchases that will paralyze the market, and public spending that relies on these purchases is propping up the economy,” Okina, a Kyoto University professor, said in an e-mail.
All economists in the survey conducted March 28 to April 3 forecast the BOJ will stay on hold at the meeting starting today. Seventy-two percent said extra easing would happen before or during July. Most said the BOJ would boost its target for accumulation of government bonds from 50 trillion yen.
Japan’s economy, the world’s third biggest, will shrink at an annualized pace of 3.5 percent this quarter after 4.4 percent growth in the previous three months, according to the median estimates in a Bloomberg News survey.
July would be a good time for the BOJ to add to its stimulus, with Prime Minister Shinzo Abe set to unveil fresh measures for his growth strategy in June, the “third arrow” of Abenomics, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. An early move would also bolster the economy ahead of Abe’s decision on whether to raise the sales levy to 10 percent, as he grapples with the world’s biggest debt burden, Kanno said.
“The BOJ can’t wait until August or later as it would limit a boost to GDP in the third quarter, which is essential for a decision of another sales tax increase as planned,” said Kanno.
Kuroda said last month that the economy will bounce back after the tax increase and grow above its potential, driven by “a virtuous cycle among production, income, and spending.” Kuroda has said the BOJ will adjust policy without hesitation if the price target becomes difficult to achieve.
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