Kuroda Fails to Convince Investors Policy Means What He Says

Updated on
  • New stimulus plan ‘is essentially tapering’: Sumitomo Mitsui
  • ‘Obvious’ reduction would risk strengthening yen: JPMorgan AM

Haruhiko Kuroda’s contention that the smallest bond purchases in two years is not a tapering of stimulus has failed to convince some analysts and investors.

Sumitomo Mitsui Banking Corp. and JPMorgan Asset Management say the Bank of Japan governor’s new policy framework, announced last month, is aimed at just that as the limit to the asset-purchase program fast approaches. In a monthly statement Friday, the central bank announced it would reduce its per-auction target by about a third for Japanese government bonds maturing in more than 10 years. The BOJ’s overall debt holdings had inflated to a record 36 percent of the market at the end of June.

“This new stimulus framework is essentially tapering,” said Daisuke Uno, a Tokyo-based strategist at Sumitomo Mitsui. “The BOJ has tried to dress it up as a strengthening of easing measures because if they admit they’re tapering, it would have major adverse consequences. So rather than a big cut in purchases right from the start, they’ll do it gradually.”

Economists have speculated about limits to the BOJ’s quantitative-and-qualitative easing program since its inception 3 1/2 years ago, when Kuroda initially announced a two-year time frame for reaching 2 percent inflation. Policy makers have said the latest stimulus revamp is meant to ensure sustainability. It came after bond purchases sapped liquidity, stifled trading, and amplified volatility. Markets are still puzzling over the implications of the changes, with benchmark yields initially rising above zero for the first time since March before sliding to a one-month low.

The BOJ plans to buy about 200 billion to 400 billion yen ($2 billion to $4 billion) of so-called superlong debt per auction in October, from 300 billion to 600 billion yen in the prior month’s announcement. Based on its plan to buy 300 billion yen at the first auction this month, that would be the least since expanding asset purchases in October of 2014, according to Bloomberg calculations that assume the same purchase amount at each operation.

For a QuickTake on why the BOJ is targeting the yield curve, click here.

The central bank cut the amount of five- to 10-year notes it bought at an auction at the end of last month to 410 billion yen from 430 billion yen previously, the first time since March it had done that before releasing its monthly statement.

It said it will continue to purchase 8 trillion yen to 12 trillion yen of debt, after shifting its stimulus framework to controlling the yield curve from expanding the money supply. It’s targeting a 10-year yield of “around zero percent.”

The benchmark yield was minus 0.07 percent on Wednesday morning in Tokyo, after reaching a one-month low of minus 0.09 percent last week.

The BOJ scrapped a two-year time frame for achieving 2 percent inflation, and instead will aim to overshoot that goal. A core measure of consumer prices is falling at 0.5 percent, the same rate as the month before Kuroda launched his easing program.

The yen has provided an additional headwind this year, after strengthening beyond 100 per dollar for the first time since 2013. It has gained about 17 percent this year, on track to end a four-year run of losses.

“After 3 1/2 years, QQE was reaching its limit -- and that’s why the BOJ introduced yield curve controls,” said Genji Tsukatani, a Tokyo-based fund manager at JPMorgan Asset Management. “They need to be very careful with how they proceed. If they taper in an obvious way, it could put pressure on the yen to strengthen.”