Bank of Japan's Kuroda Faces a Communication Challenge

  • Governor expected to tamp down expectations of policy change
  • Quarterly forecasts of growth and inflation will be in focus
Mizhuo Research Institute Economist Kazuo Momma discusses Bank of Japan monetary policy.

Bank of Japan Governor Haruhiko Kuroda faces a communication challenge: expressing his usual confidence that inflation is headed to the central bank’s target while cooling speculation that the first step in normalizing policy is nearing.

After a two-day policy meeting ends Tuesday, investors are sure to scrutinize Kuroda’s words and the latest price and economic growth forecasts for signs that the BOJ is closer to joining its global peers in dialing back its ultra-loose monetary policy.

All 43 economists surveyed by Bloomberg expect no policy change this week. Yet expectations are rising for future action. While nearly half of those surveyed said they don’t expect any BOJ tightening until at least January of next year, almost the same number predicted it would come later this year.

“Markets are increasingly sensitive to the prospect of a less-dovish BOJ, which is putting pressure on” the yen, Teck Leng Tan and Daiju Aoki, analysts at UBS CIO Wealth Management, wrote last week. The objective on Tuesday is to “get more clarity" on the BOJ’s stance, given improving growth and inflation, they said.

The BOJ releases its policy statement and quarterly outlook report in the early afternoon in Tokyo. Kuroda’s news conference is scheduled for 3:30 p.m.

The meeting will be the next-to-last before Kuroda’s term expires in April. Kuroda, who is widely expected to be nominated for another term, will likely face questions about serving again during the news conference.

Key Points

What to look for Why
  • Updates to inflation and growth projections
Upward revisions to growth forecasts are widely expected. The question is how big they will be. Big changes could be taken by markets as indicating policy normalization sooner than expected.
  • Kuroda on inflation and interest rates
Kuroda is expected to try to quell expectations of tightening by emphasizing that inflation remains far from the BOJ’s price target. Markets will be on the lookout for any new guidance on what conditions might lead the BOJ to let bond yields rise. 
  • Kuroda on bond buying
Kuroda is likely to face questions about the BOJ’s recent cut to its bond buying. Look for him to reiterate that short-term changes in the central bank’s bond operations don’t indicate policy shifts.

Expectations for normalization could make the BOJ’s job harder. The yen has rallied, touching a four-month high, since the BOJ’s reduced bond buying on Jan. 9 sparked expectations for a sooner-than-expected rate hike. A stronger yen weighs on inflation via import prices, while trimming the profits of the nation’s exporters.

With the economy growing and inflation rising, however modestly, even some BOJ board members have policy normalization on their minds. A minority has raised the need internally to eventually start discussing policy normalization, according to people familiar with the matter.

Policy Recap

Key elements of the BOJ’s yield-curve control policy:

  • Negative interest rate of minus 0.1 percent charged on some of the reserves financial institutions keep at the BOJ.
  • Yield target of about 0 percent for 10-year Japanese government bonds.
  • Increase JGB holdings by about 80 trillion yen ($722 billion) a year. 
  • Increase holdings of exchange-traded funds by 6 trillion yen a year and Japanese real-estate investment trusts by 90 billion yen annually.
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