Prudential Sees Kuroda Taking Negative Rates Lower Again in 2017

  • Rate cut in second half of 2017 is ‘main scenario’: Prudential
  • BOJ may lower rates again as early as April: Sumitomo Mitsui

Shirai: BOJ to Maintain Status Quo Unless Yen Surges

Bank of Japan Governor Haruhiko Kuroda will probably cut interest rates in Japan again next year if a stronger yen or weaker economy undermine the central bank’s progress in generating inflation, according to the Japanese asset management unit of Prudential Financial Inc.

QuickTake Negative Interest Rates

The BOJ delayed last week its timeline for achieving 2 percent inflation, saying it won’t reach that level until the year ending March 2019. Japan’s consumer prices fell for a seventh straight month in September, underscoring the challenges Prime Minister Shinzo Abe and the central bank face in trying to revive the world’s third-largest economy even after more than three years of extraordinary monetary policy.

“Our main scenario is for the Bank of Japan to ease once in the second half” of next year, said Kenji Sakaguchi, the chief investment officer at Prudential Investment Management Japan, which oversaw 19.2 trillion yen ($184 billion) at the end of June. Sakaguchi said while the BOJ may prefer to stay on hold in 2017, he is skeptical they will be able to do so.

The Japanese central bank, which committed in September to keeping the yield on the 10-year government bond at about zero, has seen that rate falling below its target as inflation expectations in the nation remain stagnant. Sayuri Shirai, who served on the BOJ policy board until March, said in a Bloomberg Television interview last week she expects Kuroda to try to maintain the current policy next year, though the governor will probably deepen negative rates if he needs to cope with a “sharp appreciation” in the yen.

Urgent Response

“If the BOJ does take further easing steps, the market thinks it will be deeper negative rates,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co. in Tokyo. Nakatani doesn’t expect the BOJ to cut again next year unless there is an urgent need, for example, if the yen appreciated to the low-90s against the dollar. A victory by Donald Trump in the U.S. presidential election this week could generate the kind of global uncertainty that would cause a stronger Japanese currency, he said.

Kuroda told parliament last week that the BOJ may need to ease again depending on the economy. Prudential’s Sakaguchi said he expects the central bank to cut rates by 0.1 percentage point to minus 0.2 percent if it eases next year. If the BOJ eases twice to bring the rate down to minus 0.3 percent, that may be its limit, he said.

Some 35 percent of analysts in a Bloomberg poll last month said they think that Kuroda’s BOJ is done with adding to stimulus. The poll was conducted before the central bank stayed pat on policy moves on Nov. 1.

Masayuki Kichikawa, the chief macro strategist in Tokyo at Sumitomo Mitsui Asset Management Co., which manages almost 12 trillion yen, said there is a little more than 50 percent chance that the BOJ could cut rates to minus 0.2 percent in April. The impact of the stronger yen against the dollar will keep inflation near zero or lower in the first half of 2017, according to Kichikawa.

“It will become very difficult for the BOJ to say that prices trends are improving,” said Kichikawa. “That is when the BOJ will face the problem of whether it is OK for them to just do nothing.”

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