Kuroda Seen Using Old-Fashioned Rate Cut as Bond Buying Limited

The Bank of Japan may resort to an old-fashioned rate cut instead of expanding bond purchases in a shrinking market, said BNP Paribas Investment Partners Japan.

Governor Haruhiko Kuroda, who refrained from changing policy after a meeting Thursday, will probably reduce the 0.1 percent rate the BOJ pays to depositors instead of buying more debt the next time the central bank eases, according to the asset manager. Its view is shared by six of the 34 economists Bloomberg surveyed on their expectations for the coming year. A majority of those said they expect officials to expand stimulus by October.

“There’s a large chance we’ll have another easing this year, and that it will be a cut in the deposit rate,” said Naruki Nakamura, the head of fixed income at the BNP Paribas unit in Tokyo. “If they increase the buying, at some point there is chance of a failure. Even if they try to buy JGBs from the market, maybe the market has no JGBs to offer.”

Central bankers face the task of how to drive the inflation rate from zero toward their 2 percent goal. Retail sales fell almost 10 percent in March from the year before, undermining Kuroda’s view that cheaper energy costs will help the economy. In its effort to pump money into the banking system, the BOJ is already buying bonds equivalent to 90 percent of what the government sells.

Nakamura’s call is worth noting given his track record. The 10-year sovereign yield was at 0.33 percent on Dec. 31, within two basis points of the range he predicted in October. BNP Paribas Investment manages or advises on about $557 billion worldwide.

Inflation Outlook

Benchmark note yields were 0.325 percent on Thursday, from as low as 0.28 percent last week, a level not seen since February.

With the inflation gauge the BOJ watches falling for seven straight months, central bank policy makers face a quandary over how to push the rate higher.

Kuroda boosted the stimulus plan in October with the aim of increasing the BOJ’s holdings of government bonds by 80 trillion yen ($673 billion) a year. The central bank is also buying stocks via exchange-traded funds as well as real estate investment trusts. It previously purchased commercial paper and corporate bonds, and it’s maintaining those holdings.

These measures have gone far beyond what other central banks have done, and Kuroda may be uncomfortable with the idea of increased purchases, Nakamura said.

Counterproductive Move

A rate cut may prove to be counterproductive, said Kazuhiko Ogata, an economist at Credit Agricole SA in Tokyo.

Such a move might prompt lenders to take money out of their BOJ accounts, hindering the central bank’s effort to increase the so-called monetary base, a measure of the amount of money in the banking system, according to Ogata.

The BOJ stopped targeting interest rates in 2013 in favor of goals for the size of the monetary base.

“If you cut the deposit rate, it would be difficult for the monetary base to increase, so there will be a mismatch,” Ogata said. “If the BOJ wants to boost the monetary base, they should not cut the deposit rate.”

Without a reduction, Kuroda will be relying on the asset purchases that haven’t been enough to spur inflation so far.

Following the meeting, the BOJ cut its growth and price estimates for the year through March and said it now sees price gains reaching its goal in the first half of the following fiscal year.

Kuroda may be preparing to jolt the markets, according to Tsuyoshi Ueno, senior economist at NLI Research Institute. The BOJ will implement further stimulus including a reduction in the deposit rate to minus 0.1 percent in July, he said.

“They may not just use one method, but several of them to come up with a surprise,” Ueno said. “A cut to 0.05 percent or zero percent wouldn’t be sufficient to have meaningful impact. If it’s cut to negative, it would be a positive surprise.”

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