Japan's Central Bank May Up Easing Commitment, Analysts Say

  • Pledging prolonged stimulus could raise inflation expectations
  • Easing program has swept up more than a third of JGB market

Policy Review: Is the BOJ Running Out of Tools?

A strengthened commitment by the Bank of Japan to maintain unprecedented monetary easing for a prolonged period would be a logical conclusion of its comprehensive review, analysts say.

BOJ Governor Haruhiko Kuroda earlier this month indicated that the central bank hadn’t been able to sustain higher inflation expectations among Japanese businesses and consumers by setting and pursuing a 2 percent inflation target because their expectations are still more "adaptive" -- or influenced by actual prices. The BOJ’s review of its easing program will be concluded at its meeting Sept. 20-21.

One option for the central bank would be to seek to shake up inflation expectations by pledging to keep going with its mega-stimulus program, which has already vacuumed up more than a third of Japan’s government-bond market. It could do that by promising to maintain its debt holdings, or a portion of them, even after reaching the 2 percent target.

‘Forever’ Bonds

“Permanent commitment to easing is the way the BOJ should be going to turn around inflation expectations,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG and a former BOJ official. “They should promise to buy up to 50 percent of the entire bond market and pledge to keep some of them forever.”

From the start of his tenure in 2013, Kuroda has sought to lift inflation expectations and quash a “deflationary mindset” in Japan. Speaking earlier this month about the comprehensive review of the bank’s efforts, he signaled that the long period of deflation had made this more difficult. 

“The view is entrenched among people that inflation will continue to be sluggish because it has been so for a long time,” Kuroda said in a Sept. 5 speech.

Shirakawa said the BOJ can make three layers for their bond holdings after buying half of the quadrillion-yen market. The bank can pledge to hold 10 percent permanently and 20 percent until 2 percent inflation becomes stable -- and the rest until price growth hits 4 percent, he said.

Inflation Expectations

Delving into economist-speak, Kuroda said the “adaptive formation mechanism” for inflation expectations had ultimately dominated over the “forward-looking formation mechanism.” The “adaptive” mechanism is where people expect inflation to continue at the current pace, and the “forward” mechanism is the point at which they believe policy makers’ actions will ensure inflation hits the target.

Inflation expectations rose during the first year of the BOJ’s stimulus program, but before the forward-looking mechanism became strong enough, oil prices fell, which along with other factors caused inflation expectations to weaken, Kuroda said.

The BOJ now says it will continue easing until inflation has stabilized at 2 percent.

Combining an expansion of monetary easing with a promise to sustain it for the long haul could help boost inflation expectations, in the view of some. BOJ officials themselves have debated a strategy of maintaining a large balance sheet, at least back in 2014, people familiar with the discussions said at the time.

“There is a tangible possibility that Kuroda could seek to reinforce the adjustment of the current settings of policy with additional forward guidance on the future path of policy,” Krishna Guha and Ernie Tedeschi at Evercore ISI wrote in a note. “He could make explicit what we view as an already implicit commitment not to pull back from stimulus until inflation has moved above 2 percent for a period of time.”

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