Abe’s Tax Delay Splits Economists on Kuroda’s Next Policy Move

  • Postponing levy hike could give BOJ more time to wait
  • Kuroda may seize the opportunity to maximize impact now

Prime Minister Shinzo Abe’s decision to delay an increase in Japan’s sales tax has driven a wedge between central bank watchers.

Some analysts who’d expected more monetary stimulus soon are pushing back their forecasts, arguing that Abe has given Governor Haruhiko Kuroda breathing space until later this year. Others contend that Kuroda has to take action as soon as this month or next to keep his inflation target in sight, and that he’ll get an extra bang for his buck by moving in lockstep with the government.

The stakes are rising for Kuroda, who’s cut interest rates into negative territory and bought bonds at a record pace for more than three years, without generating his desired price gains. He disappointed markets in April by keeping monetary policy unchanged -- when a slim majority of economists projected further easing -- and that’s left investors questioning whether the Bank of Japan is running up against the limits of its effectiveness.

Among 12 economists polled by Bloomberg this week as the Abe administration telegraphed its intentions on the sales tax, eight projected more monetary stimulus this month or in July, while four said the BOJ could wait and see for now. The next BOJ policy meeting is June 15-16.

‘Policy Coordination’

“The next meeting would be a good time for the BOJ to move,” said Nobuyasu Atago, a former head of the BOJ’s price statistics division who is now chief economist at Okasan Securities Co. “Japan is looking for strong policy coordination.”

Some officials at the central bank said earlier this year they viewed a delay in the sales-tax increase as a good thing for achieving the 2 percent inflation target, people familiar with the discussions said.

Sayuri Shirai, who retired from the board at the end of March, said she doesn’t expect any change this month because the BOJ needs to keep watching the impact of negative interest rates.

Mari Iwashita, chief market economist at SMBC Friend Securities Co., said the tax postponement and the current state of markets and the economy have removed the sense of urgency for the central bank to act soon.

“This isn’t the time for the BOJ to use its scarce resources for further easing,” she said. “Financial markets are calming down and Japan’s economy isn’t deteriorating.”

Wild Card

A wild card for the June 15-16 decision is what the Federal Reserve will do at its own gathering, which finishes a day before the BOJ’s decision. A U.S. rate rise could send the yen falling against the dollar, potentially offering less need for the BOJ to act.

While Japan’s economy has moved back and forth between slight growth and contraction since Abe came to power in late 2012, the latest reading on gross domestic product showed an unexpected 1.7 percent annualized increase in the first quarter versus a year ago. Japan fell into recession in 2014 when the sales tax was raised to 8 percent from 5 percent.

The yen has surged 9 percent this year, hurting exporters, but has eased from its highs reached in early May. The Topix stock index has dropped 12 percent this year.

“The BOJ is coming closer to the point where it must concede by taking action, irrespective of Abe’s decisions on the tax delay,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co., who is also a former BOJ official. “I expect more easing in July.”

Unlike in 2014, when Kuroda indicated support for the tax increase, he has refrained from suggesting his preference this year, saying the decision was up to the government.

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