Living Large: Bank of Japan Sorts Challenges With Its Epic Size

  • Buying longer-dated debt may help sustain record purchases
  • Banks can use certain loans as collateral, as bonds dry up

Talk about being big in Japan. With the central bank’s balance sheet surpassing three-quarters the size of the economy, policy makers are having to solve operational challenges to keep its reflation program going.

In changes that Bank of Japan Governor Haruhiko Kuroda himself conceded were hard to understand, the BOJ Friday took steps to make it easier to keep going with its record monetary stimulus. The statement sent the stock market on a roller-coaster ride, as equities surged when it first appeared the BOJ was boosting its purchases, then sank when traders saw that wasn’t the case.

Haruhiko Kuroda

Photographer: Akio Kon/Bloomberg

The key takeaway was that the BOJ’s main initiative, expanding the monetary base through bond purchases, was held at 80 trillion yen a year ($657 billion). While consumer price gains are far from the 2 percent target, Kuroda said the inflation trend is improving and the economy is gradually recovering.

Tools Aplenty

“This all simply highlights the fact that it’s not easy to push on a string,” Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who previously worked at the BOJ, said of the fine-tuning unveiled Friday. “Some thought that they won’t ease any more because of a lack of tools. The message from Kuroda is that that’s wrong, the BOJ still has plenty of tools to increase the balance sheet.”

The market’s confusion stemmed from the creation of a program to buy about 300 billion yen a year of exchange-traded funds. While small, it at first appeared the BOJ was expanding its stock holdings.

The details of the statement showed the effort was to counter the impact of coming sales of equities that the BOJ accumulated in the past decade. The previously bought shareholdings were from an effort that started in 2002, a reminder of how long Japan’s central bankers have been in the business of trying to overcome deflation.

In a tweak to its main initiative, the BOJ said it will buy more longer-dated government bonds. With the central bank holding more of the country’s sovereign debt than any other investor class -- its share is in excess of 30 percent -- this may make it easier to keep scooping up more of the market.

Technical Tweaks

In other changes, the central bank said it will raise the cap on the share of each real estate investment trust it buys into -- to 10 percent from 5 percent -- and it loosened rules on the collateral banks can submit for credit from the central bank. Lenders typically use government bonds as collateral, but with the BOJ buying so much of them, their supplies are diminishing, even in a country with the world’s largest debt burden.

Kuroda unleashed his original program in April 2013, with a view to achieving the 2 percent inflation target in about two years. Two and a half years on, prices are rising at most about 1.2 percent, using a measure monitored by the BOJ that strips out fresh food and energy. Board members don’t foresee reaching their consumer price index goal until the latter part of the 2016 fiscal year, which ends in March 2017.

“The BOJ is starting to think that meeting the price target is going to be a battle of endurance,” said Daiju Aoki, an economist at UBS Group AG in Tokyo. “The BOJ wanted to make the massive easing program sustainable and today’s adjustments will make it easier for the BOJ to expand the program when needed.”

BOJ’s balance sheet dwarfs its counterparts’

Ahead of the BOJ meeting, economists surveyed by Bloomberg were almost evenly divided over whether the central bank will again expand its stimulus program, which was last enlarged in October 2014.

Aoki estimated that with the change in its rules for real estate investment trusts, known as J-REITs, the BOJ will be able to buy 400 billion yen more of them. The central bank is currently buying about 90 billion yen a year.

Kuroda’s Commitment

“This will make it possible to proceed with asset purchases even more smoothly and it will make us firmly continue qualitative and quantitative easing,” Kuroda told reporters in Tokyo after the policy decision. “Also, I want you to understand that today’s adjustments were to enable us to quickly respond when we judge we need action for attaining the price target at the earliest time possible.”

The governor also said that “of course, we would have to do something bold when we have to add stimulus or if we have to address risks when they are materialized.”

Underscoring the BOJ’s deep dive into unconventional monetary policies -- having approached the zero bound on its benchmark rate for the first time in the late 1990s -- the Friday statement will spur a new type of exchange-traded fund.

The BOJ said it will buy ETFs tracking the JPX-Nikkei Index 400, a gauge championed by the Abe administration that selects companies based mainly on performance of return on equity and operating profits. Those don’t exist yet. The new program starts in April 2016.

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