BOJ Maintains Stimulus as Pressure Rises to Talk About ExitBy
Central bank raises its assessment of private consumption
Inflation expectations remain in a weakening phase in Japan
With inflation still distant from its target, the Bank of Japan left its monetary stimulus program on cruise control, saying improving private consumption will support a growing economy.
The policy statement Friday came on the heels of the Federal Reserve’s third interest rate increase since December, underscoring how the BOJ continues to fall behind its global peers in normalizing policy. It will continue to manage the yield curve through a negative interest rate and buying trillions of yen worth of bonds, as expected by economists surveyed by Bloomberg.
Japan’s longest period of economic expansion in a decade has provided some support for the BOJ, which hasn’t changed policy since September last year. While the amount of bonds it buys is slowing, there is little expectation that it will substantially change course during the rest of Governor Haruhiko Kuroda’s current term. Calls are growing louder for him to at least map some details of how the BOJ may eventually exit stimulus.
"The policy statement is like a curtain raiser and Kuroda’s press conference will be the main show," said Kyohei Morita, chief Japan economist at Credit Agricole Securities in Tokyo. "Market participants are going to take a close look at his comments on future exit. There’s so much room for the BOJ to improve its communications."
Even so, Morita said he expects Kuroda to avoid commenting too much on exit at the 3:30 p.m. press conference because the BOJ is still far from its 2 percent inflation target.
Akio Negishi, the president of Japan’s life insurance association, said last week that the BOJ should talk openly now about how it might unwind its policies, even if it has to change its approach later. The life insurance industry is the third-biggest holder of government bonds, after the BOJ itself and commercial banks. Hiroshi Yoshikawa, a former adviser to the finance minister, echoed that in urging the BOJ to talk about exit.
Not everyone thinks it’s so urgent for the bank to start that discussion.
“It’s not strange that Kuroda isn’t talking about an exit plan when inflation’s around zero percent. It’s just too early,” said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. “The problem is that some started to wonder if the BOJ is really thinking about exit at all. That’s something Kuroda would want to clarify.”
While Kuroda has said talk of any exit from monetary stimulus is premature and would end up confusing markets, the bank is re-calibrating its communications to acknowledge that it is thinking about how to handle an eventual exit, people familiar with the matter told Bloomberg this month. However, they don’t want to give the impression that this is on the agenda anytime soon.
Key elements of the BOJ’s monetary stimulus policy, which were left unchanged by a 7-2 vote, are:
- A negative interest rate of minus 0.1 percent applied to some of the money financial institutions keep at the BOJ.
- Purchases of government bonds, which aim to keep the 10-year bond yield at about 0 percent.
- To increase its holdings of JGBs by about 80 trillion yen ($720 billion) a year, although even Kuroda has acknowledged that it’s only rising by about 60 trillion yen.
- To buy ETFs so holdings rise by 6 trillion yen a year and to keep increasing its holdings of JREITs by 90 billion yen.
- Holdings of commercial paper will continue to be about 2.2 trillion yen, while corporate bond holdings will stay at about 3.2 trillion yen.
The overall assessment of the economy was unchanged, with the BOJ characterizing it as "turning toward a moderate expansion."
Talk about exiting monetary easing is gaining momentum around the world. The Fed gave further details of its plan to normalize its balance sheet this year as it raised rates. The European Central Bank softened its easing bias at a meeting this month, reinforcing a view that it is moving toward the exit.
The wider debate about winding down stimulus in Japan doesn’t indicate confidence that the central bank will reach its goal. Forty of 42 economists surveyed by Bloomberg said the 2 percent inflation target is unattainable within the BOJ’s projected time frame.
"What’s changed is that others have started calling for an explanation of an exit," said Masaki Kuwahara, senior economist at Nomura Securities in Tokyo. "There’s a possibility that the BOJ may respond and answer to some extent, but they are not going to change their policy for a while.”
— With assistance by Masahiro Hidaka, Connor Cislo, Maiko Takahashi, Shoko Oda, Kazunori Takada, Keiko Ujikane, and Yoshiaki Nohara