BOJ Positions for Post-Kuroda Era With Policy for Long Haulby
Shift away from fixed monetary-base expansion is regime change
Kuroda managed pivot without surge in market volatility
Japan’s central bank has effectively positioned itself for an era of monetary stimulus that extends beyond the radical tenure of Governor Haruhiko Kuroda.
The Bank of Japan board on Wednesday ditched what had been lodestones for Kuroda since he took the helm in 2013 -- a two-year time frame for achieving 2 percent inflation, and a money-expansion strategy at the core of stimulus policy.
With its new yield-curve targeting approach, the BOJ is set up for the long haul, and has minimized the sustainability risk surrounding the previous, massive 80 trillion yen ($791 billion) fixed annual bond-buying target.
It’s a far cry from the fanfare that greeted Kuroda, now 71, in 2013. Japan was so eager for him to take the helm that stocks soared and the yen slid when his predecessor decided to quit weeks early. With less than 19 months to go, he faces the prospect, like Masaaki Shirakawa before him, of failing to reach his inflation goal.
No BOJ governor has been tapped for a second five-year term since the 1960s, and die-hard reflationists who had backed Kuroda’s appointment by Prime Minister Shinzo Abe are now shifting against him.
“I think that’s a bad sign,” said Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “This is tightening -- I’m very disappointed.”
What Kuroda has potentially bequeathed his successor is greater flexibility. So far at least, the governor has been able to maneuver the bank away from fixed money expansion without triggering a big sell-off in stocks or a surge in the yen.
There’s no guarantee that the new strategy -- fixing low long-term rates -- will prove any more effective in reflating the Japanese economy than fixing the overnight rate, which has been at zero, or thereabouts, for two decades. But at this point "whatever it takes" might be simply keeping easing going as long as possible.
Naohiko Baba, chief Japan economist at Goldman Sachs, said the BOJ’s shift looked to be aimed at doing just that, while possibly marking a "first step toward stealth tapering" of its purchases of Japanese government bonds.
"With the 2 percent inflation target still way out of reach, we think the BOJ’s commitment to applying monetary easing until inflation stabilizes above that target comes close to implying that monetary easing will continue almost in perpetuity, or at least well beyond Haruhiko Kuroda’s term as governor ends," Baba wrote in a report on Wednesday.
Kuroda insisted in a news conference after the BOJ policy decision was announced that the central bank hadn’t reached the practical limits of its bond-buying and wasn’t moving toward tapering. He said it had strengthened its previous framework.
The governor underscored Monday in an Osaka speech that "talking about a limit to monetary policy does not help at all." Kuroda also said that accelerating the expansion of the monetary base could be an option in future, depending on economic activity, inflation and market conditions. In that case, "interest rates are likely to decline significantly, regardless of yield curve control."
"I must say that it took more time than expected to overcome deflation," Kuroda said in the prepared text of Monday’s speech.
Sustainability was never part of the plan when Kuroda took over. Why the BOJ’s inflation target remains about as distant now as it was then is debatable. Kuroda has blamed factors largely beyond the BOJ’s control, and there is little doubt they played a role.
Inflation and expectations were on the rise among Japanese consumers and business leaders, but the Japanese government went ahead with a sales-tax increase in April 2014, and consumers snapped their purses shut. Oil prices collapsed starting later that year, becoming a deflationary force, and weakness in global emerging markets contributed to a strengthening of the yen, further undermining the BOJ’s cause.
All of these conditions, Kuroda said in a speech on Sept. 5, had contributed to a weakening of inflation expectations since the summer of 2015, after an earlier rise. He said Japan’s long battle with deflation had made raising expectations more difficult, particularly in the face of contrary conditions.
The BOJ may have missed its best chance at convincing the Japanese people that 2 percent inflation is on the way -- at least during Kuroda’s tenure. But as Kuroda noted in his speech, the combination of quantitative easing and negative interest rates have had powerful effects on borrowing costs. By keeping the easing going, even if at a diminished level, Kuroda is keeping the BOJ in the game for now.
How long that lasts remains to be seen. Naka Matsuzawa, chief strategist at Nomura Securities in Tokyo, said in a report Wednesday that the BOJ may also have reached the beginning of the end.
"From a medium-term perspective, it’s a quiet step toward an exit," he said. "The BOJ subtly obscured this in the comprehensive review, and when we look back on it later, it’s likely to be interpreted as the start of the exit debate."