Japan's Central Bank May Be Giving Up on Surprising MarketsBy
Speeches by Kuroda and Nakaso offer more insight on thinking
BOJ officials are conducting a comprehensive review of policy
The Bank of Japan is ditching the tactic under Governor Haruhiko Kuroda of surprising markets with its monetary decisions.
That’s the conclusion of BOJ watchers sifting through speeches and media appearances with Kuroda and other officials in recent weeks, which have offered far greater insight into the central bank’s thinking than previously in the governor’s term.
Delivering unexpected policy decisions might have added potency to easing early on in the Kuroda era, when the main tool was simple asset purchases, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo. Stocks jumped and the yen slid when Kuroda unveiled his first, greater-than-anticipated, stimulus in April 2013 -- and did so again when the board, against forecasts, doubled down in October 2014.
Leaving markets without guidance did the BOJ no favors in December, however, when equities tumbled and the yen jumped after a complicated tweak to the stimulus program that at first appeared to be an acceleration in easing.
Then in January, the shock adoption of a negative interest rate strategy that Kuroda had previously rejected fed a narrative that the BOJ was starting to run out of ideas. While central bank officials reject that they had ever sought to surprise markets, recent remarks indicate a major shift in their approach.
Kuroda and Deputy Governor Hiroshi Nakaso separately last week highlighted both costs and benefits of the BOJ’s policies, using similar language. They provided analysis on the negative-rate tool and why bond yields fell more than anticipated, along with a recognition of the danger of too-low long-term rates damaging confidence.
"The BOJ communication strategy has totally changed in the past several weeks," said Kanno, who used to work at the BOJ. "They don’t want to surprise the market anymore."
While only the result of the central bank’s comprehensive review of its programs and its policy decision on Sept. 21 will bear out the conclusion, Kanno’s observation about an abandonment of the surprise tactic is shared by others. Daiju Aoki at UBS Group AG made the point in a note after Kuroda’s Sept. 5 speech.
"Kuroda’s remarks were previously strong affirmations of existing policies and expressions of the principle that additional monetary easing would be carried out without hesitation if it was necessary," leaving little room for signaling or analysis, Takashi Miwa, chief Japan economist at Nomura Holdings Inc. in Tokyo, wrote earlier this month. Now, "the BOJ is changing its communication strategy to one more focused on dialog with the market."
Neither Kuroda nor Nakaso betrayed the final conclusions of the review, or what next week’s policy decision will be. Yet the discussions of potential harm from excessively low yields on long-maturity bonds gave an indication that the central bank prefers to see significantly positive rates in that part of the yield curve.
Those remarks have spurred some to anticipate tweaks to the BOJ’s bond-buying program to ensure a desired yield curve.
Yet market moves have already achieved a steeper yield curve, responding to the officials’ signals, with 20-year government bond yields back above 0.4 percent after dipping to around zero earlier this year. Kanno said there may be no policy signal on the yield curve, with the Financial Markets Department having scope to vary the bond purchases as needed through regular monthly announcements.
Both Kuroda and Nakaso highlighted that the introduction of a negative rate on a portion of the reserves commercial banks park at the BOJ has not hurt their ability to lend, and noted that companies have taken advantage of cheaper rates and sold long-dated bonds.
That indicates no suggestion of any move to abandon the current benchmark-rate tool, which if anything could be taken deeper into negative territory, analysts said. A cut in the minus 0.1 percent rate could help undermine the attraction of the yen, generating a more competitive exchange rate, while also steepening the yield curve -- a shift that may help banks.
Meantime, the recognition by policy makers that inflation expectations haven’t played the role in pushing up consumer prices originally anticipated suggests the BOJ is girding for sustaining stimulus for the longer haul. Kuroda in an interview with Sankei newspaper last month said the bank will discuss things like making the bond purchases target a range, which could offer greater flexibility.
By giving both pros and cons to the current framework, investors have more to analyze and interpret -- and it still leaves the potential for some to be disappointed or surprised by the board on Sept. 21. Even so, the new approach is "very healthy," Kanno said.
One caveat on the no-major-surprises conclusion, however: Kuroda in his Sept. 5 speech said "other new ideas should not be off the table."