BOJ Watcher Calls Range From Triple-Bazooka to Stealth Taper

Updated on
  • Some see tapering yet others predict expanded asset purchases
  • Time frame for inflation target also a matter of debate

Some analysts expect the Bank of Japan to fire another blast of monetary stimulus at the end of its two-day policy meeting on Sept. 21. Others see a central bank with little if any ammunition left -- or one turned gun-shy.

For some economists, the BOJ’s decision to undertake a comprehensive review of its easing program to be concluded at the meeting underscored its struggle to hit the 2 percent inflation target, and bolstered arguments that it had reached the limits of its powers.

Others expect the review to lead to greater efforts by the central bank to stoke inflation and revive growth, whether by doubling down on past methods or trying new tools.

Governor Haruhiko Kuroda has said the central bank wouldn’t consider cutting the overall level of monetary stimulus, while no new ideas are off the table -- except for helicopter money, which is illegal in Japan.

Many analysts expect the BOJ to stand pat next week. The following is a selection of forecasts for action:

Asset Purchases

The BOJ’s massive purchase of Japanese government bonds -- the core of its easing program -- has raised questions about how sustainable it is. The BOJ now holds more than one-third of outstanding JGBs, having bought so many that the country’s biggest banks are running out of inventory to sell.

Yet some analysts predict the BOJ will expand purchases of JGBs and risk assets such as exchange-traded funds as Kuroda makes good on his vow to do whatever it takes to reach the inflation target.

More J-REITs, Rate Cut

Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo, said he expects the BOJ to raise its asset-purchase target to 90 trillion yen ($876 billion) a year, from 80 trillion yen, and to buy more risk assets such as real-estate investment trusts, while leaving the volume of JGB purchases unchanged.

Kanno said he also expects the BOJ to cut the negative rate on some bank reserves to minus 0.3 percent from minus 0.1 percent. “When the review is out, the BOJ can say it’s explained its operations and it will ease further. A deeper cut in the negative rate will be the main driver,” he said.

Loosen Purchase Target

Economists at Barclays Plc and BNP Paribas SA are among those who said in recent reports that they expect the BOJ to widen its annual asset-purchase target to a range of 70 trillion to 90 trillion yen, compared with 80 trillion yen now. This would give it more flexibility if it struggles to find enough JGBs to buy, while enabling Kuroda to plausibly deny that the bond-buying is becoming unsustainable, they say. 

Cut JGB Purchase Target

Kazuhiko Ogata, an economist at Credit Agricole, said he expects the BOJ to go a step further and lower the target for its JGB purchases. “Kuroda could argue that he isn’t tapering as long as its holdings increase,” Ogata said, adding that tapering “has to happen sooner or later.”

More Corporate Bonds

The BOJ may buy more corporate bonds to lower borrowing costs for businesses, according to economists at Mitsubishi UFJ Morgan Stanley Securities Co. and BNP Paribas. Hiroshi Miyazaki, a senior economist at MUFJ Morgan Stanley, said the BOJ could raise its annual holdings target for corporate bonds by 2 trillion yen ($19 billion) from 3.2 trillion yen. 

Negative Interest Rates

In a speech on Sept. 5, Kuroda said the combination of the BOJ’s asset purchases and negative rates had proven “extremely powerful,” pushing down rates on bonds of all durations and lowering borrowing costs for businesses and households. He said there’s still “ample space” to cut the rate from the current minus 0.1 percent.

Kuroda acknowledged that lower lending rates had dented banks’ profits, which could eventually hurt their enthusiasm for lending. He said lower yields on JGBs had hit returns on pension products, causing some businesses to cut profit forecasts.

Cut Negative Rate

Betty Rui Wang, Northeast Asia economist for Standard Chartered Bank in Hong Kong, and Nobuyasu Atago, chief economist at Okasan Securities in Tokyo, are among those who expect the BOJ to look past the drawbacks and push the negative rate to minus 0.2 percent.

Negative-Rate Loans for Banks

Hideo Hayakawa, a former executive director of the BOJ, said the central bank should offer a negative rate on loans it makes to commercial banks through a special lending program. This would help offset the impact of negative rates for banks, while comforting consumers, Hayakawa said.

Forward Guidance

One way to bolster sentiment would be to commit to ending the negative-rate policy by a certain date, said Yasunari Ueno, chief market economist at Mizuho Securities Co. This would help steepen the yield curve, enabling the BOJ to say it was trying to limit the impact of negative rates on bank earnings, he said.

Inflation Target

When Kuroda first took over in 2013, he said the BOJ was committed to hitting the 2 percent inflation target within about two years, and would do whatever was necessary to meet that goal. Repeatedly pushing back the time frame has undermined the BOJ’s credibility.

Economists at Barclays expect the bank to drop its reference to the two-year time frame, while reiterating a commitment to meet the target “at the earliest possible time."