Bank of Japan Stuns Market by Holding Off on More Stimulus

  • Keeps three key tools unchanged; majority forecast some action
  • Policy makers delay forecast for reaching 2% inflation goal

BOJ Stimulus on Hold as Kuroda Assesses Negative Rates

The Bank of Japan held off on expanding monetary stimulus, as Governor Haruhiko Kuroda and his colleagues opted to take more time to assess the impact of negative interest rates.

The move comes as a surprise to the slight majority of economists surveyed by Bloomberg who had projected some action from the central bank in response to a strengthening in the yen that has cast a shadow over prospects for higher wages and investment. The currency rallied against the dollar immediately after the decision while stocks in Tokyo tumbled.

Policy makers are betting that their success in bringing down borrowing costs since unveiling the negative-rate strategy in January will generate an acceleration in lending. They left unchanged three key easing tools -- the 80 trillion yen ($732 billion) target for expanding the monetary base, mostly through government-bond purchases, the 0.1 percent negative rate on a portion of the cash banks park at the BOJ, and a program to buy riskier assets including stocks. Separately, they postponed their time frame for reaching a 2 percent inflation target, to sometime in fiscal 2017, for the fourth delay in about a year.

“Kuroda wanted to make it clear the BOJ won’t make monetary policy driven by market demands. It’s too early to make another move after implementing the negative rate a couple of months ago,” said Kyohei Morita, chief Japan economist at Barclays Plc. “The important message is that the BOJ will be data-dependent and I expect they will bolster stimulus in July as they review the outlook of inflation.”

Morita added that while the central bank appears to be concerned about a strong yen, recent signs of stabilization in the foreign exchange and stock markets provided them with some relief.

Yield curve as of April 27, compared with where it was the day before BOJ unveiled negative rate.

While markets reacted with disappointment, the decision is in keeping with past practice, when Kuroda opted to give time to see the effects of his actions. His unprecedentedly massive stimulus has -- since it began in April 2013 -- helped to support bank lending, which has reached its highest level since 2002.

The benchmark Topix stock index fell 3.2 percent. The banking sub-index slumped further, by 6.3 percent, following the lack of any move to help banks cope with negative interest rates. People familiar with talks at the central bank said earlier this month that BOJ officials may consider offering a negative rate on some loans to commercial lenders, without specifying a timeframe. No such move came Thursday.

Speaking at briefing after the decision, Kuroda said now was the time to watch the impact of the negative-rate policy, adding that it will spread and be felt in the economy. The governor also said he doesn’t see a limit to monetary policy.

“The markets are saying the Japanese have to do more. They are already doing a ludicrous amount, but clearly it is not enough,” said Michael Every, an analyst with Rabobank International in Hong Kong. “Fiscal policy seems to be what we have to look at now.”

Where the BOJ has had less success is stoking growth and consumer prices, with companies limiting wage gains and investment spending. Behind Japan Inc.’s lack of ambition on the domestic front: a shrinking customer base as the nation’s population declines, and a currency market that has demonstrated a cheap yen may not be around for the long haul. Kuroda and other BOJ officials expressed concern this month that the yen’s appreciation this year could damage corporate sentiment.

Japan’s gross domestic product contracted in the final three months of 2015. Deutsche Bank predicted that the economy shrunk in the first quarter of 2016, which would translate into two consecutive quarters of contraction -- the definition of a recession.

Hours before the BOJ announcement, economic data for March underlined the struggle policy makers are having to fan reflation. Consumer prices excluding fresh food dropped the most in three years, household spending slid and industrial production capped a soft rebound in March.

In their outlook statement on the economy and prices, the board’s estimate for the key inflation gauge dropped to 0.5 percent this fiscal year that started in April and 1.7 percent in the following 12 months. Their projections for GDP were lowered to 1.2 percent and 0.1 percent, respectively.

Fiscal Focus

With monetary policy on hold, attention now turns to the Abe administration and discussions of a supplementary spending package to help shore up growth. Prime Minister Shinzo Abe also has yet to decide whether to postpone a sales-tax increase scheduled for April 2017, as several of his advisers have urged.

Abe has already said he’ll create a supplementary budget to address the economic damage caused by deadly earthquakes in Kumamoto earlier this month. The central bank said on Thursday it would supply 300 billion yen of funds to banks affected by the quakes.

One constituency that may be pleased with Japan’s inaction is its overseas trading partners. U.S. Treasury Secretary Jacob J. Lew earlier this month signaled there was no cause for Japan to intervene in the currency market -- something it hasn’t done since 2011 -- to address yen gains. South Korea has in the past been vocal at expressing concern about a cheapening yen.

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