The Heat Is On for Japan's Central Bank to Actby
Pressure to act is the most since Kuroda’s debut, survey shows
Outsize expectations for action make it tougher to surprise
The policy decision by the Bank of Japan Friday is turning into one of the most closely watched economic events of the year in Japan, with Governor Haruhiko Kuroda facing intense expectations to deliver more monetary stimulus.
In fact, Kuroda and the BOJ board hasn’t faced such pressure to act since his first meeting as governor in 2013. Thirty-two of 41 analysts in a Bloomberg survey forecast that the board will expand its record stimulus program at the meeting that ends Friday -- the highest percentage of respondents in the poll in more than three years.
Any decision is almost certain to move the markets, with the big question being whether Kuroda will opt for more stimulus or disappoint, as he has in the past, at least in the view of some forecasters. If he does step on the easing pedal, the next question is whether he uses the current three monetary tools, or springs some unanticipated new tactic.
“It’s Kuroda -- you can’t underestimate what he is going to do,” said Yasuhide Yajima, chief economist at NLI Research Institute. “What’s certain is that Kuroda has to do something extreme or unthinkable if he wants to surprise.”
The board meeting typically ends between noon and 1 p.m., followed by Kuroda’s press briefing at 3:30 p.m. After the meeting, the BOJ will release its outlook for inflation and economic growth.
Here is what to watch:
Will the BOJ ease and how?
No action would be the biggest surprise, particularly after government officials made clear they would like central bank cooperation with their coming fiscal stimulus, and such an announcement would disappoint markets.
The most-favored easing option is expanding purchases of exchange traded-funds, with the next most mentioned a deeper cut in the negative interest rate applied to a portion of the money that commercial banks park at the BOJ, the Bloomberg survey showed.
Just less than half of the respondents said Kuroda would accelerate buying of government bonds, which is the mainstay of his efforts to spur more inflation.
The spectrum of forecasts includes a boost to government bond buying to as much as 100 trillion yen a year -- up from 80 trillion, quadrupling exchange-traded fund buying and cutting the policy interest rate to -0.3 percent. A more radical option: a pledge to maintain the BOJ’s balance sheet in its forward guidance.
A drastic expansion of stimulus contains risks. Some may see it as a step toward hitting policy limits, with growing concerns about the sustainability of the easing program. There’s a limit to the amount of bonds in the market and the faster the BOJ buys them, the sooner it hits the ceiling. The size of the BOJ’s balance sheet is now more than 80 percent of Japan’s gross domestic product.
Recent BOJ meetings have caused roller-coaster reactions in the markets, even with lesser expectations for action than the case for this meeting. If the BOJ leaves policy unchanged, the yen is likely to strengthen and stocks to fall. Even if the board eases, it’s unclear how markets will react, because at least some easing has already been discounted. If investors shift focus to a narrative that the BOJ is running out of options, the yen and stocks would go the same way as with no easing at all.
The memory of the negative interest rate decision in January is still fresh among BOJ officials, where they surprised markets and received criticism from the Japanese public and some lawmakers in the aftermath.
Inflation Target Timing
The BOJ expects 2 percent inflation to be achieved “during fiscal 2017,” which is the year through March 2018. Market participants are paying close attention to whether the BOJ will push back the timing for the fifth consecutive time.
If the delay comes without stepping up stimulus, Kuroda will need to explain at the press conference whether this means the BOJ is approaching its policy limits. Alternatively, board members could boost their stimulus and keep their current timeframe for reaching 2 percent inflation, confident that their moves will bear the forecast out. Some analysts think Kuroda would rather avoid delaying further, as that would indicate rising chances of missing the 2 percent target during his term, which ends in April 2018.
A wild-card option: shift to making 2 percent a longer-term target, with something easier in the nearer term, such as a 1 percent to 2 percent range. Some former BOJ officials have urged a rethink of the inflation-target framework, so a change of some sort might not be impossible to imagine.
Prime Minister Shinzo Abe’s government has added pressure for bolstering monetary stimulus at this meeting. Abe in a surprise announced his economic package on Wednesday, which economists including Daiju Aoki saw as an intention to pressure the central bank by showing the government it is doing what it can to spur growth.
On the same day, Economy Minister Nobuteru Ishihara said the BOJ will make an appropriate decision given Abe’s package, according to Kyodo News. Kuroda was handpicked by Abe in 2013 and has implemented aggressive easing measures as part of the Abenomics program. After his ruling party had a big victory in the upper house election on July 10, Abe has said he will accelerate his efforts to end deflation.
Since the BOJ policy meeting in mid-June, the talk of greater fiscal and monetary coordination has grown. By taking action now, Kuroda can show that the BOJ is working with the government and trying to maximize the policy impact. Kuroda has repeatedly said that underwriting government bonds -- or so-called helicopter money -- is prohibited, but a policy mix of fiscal spending and monetary stimulus could enlarge the boost to the economy.
“Abe’s announcement that planned fiscal stimulus would reach 28 trillion yen -- equal to 6 percent of GDP -- puts heat on Kuroda to act,” Yuki Masujima, an economist at Bloomberg Intelligence, wrote in a report Thursday. “More easing would show the BOJ is on board with efforts to jump-start the economy, even if Kuroda stops short of launching helicopter money.”
Kuroda’s Press Conference
Whatever the BOJ does Friday, the 2 percent inflation target will remain far off in the view of almost all private forecasters. Japan’s core consumer prices fell 0.4 percent in May, the same amount as when Kuroda began his stimulus program more than three years ago. He will need to explain how his decision will help reach the target, and whether he is willing to take further measures to do so.