Here's What We Learned About the BOJ From 12 Hours of Testimony

  • Kuroda says exit may be considered but not conducted in FY2019
  • Deputies Wakatabe, Amamiya differ on limits of monetary policy

The Bank of Japan is set to keep its massive monetary stimulus unchanged for the foreseeable future, with the three nominees to lead its board stressing that inflation is too far from target to begin normalizing policy soon.

Taken from a combined 12 hours of testimony in parliament, here is what we know about the latest thinking from Haruhiko Kuroda, who was nominated for another five-year term as governor, and the two nominees for the deputy governor roles. They are all expected to be confirmed by parliament, where Prime Minister Shinzo Abe’s coalition has a majority, in the coming weeks.

Kuroda, the incumbent

In his first round of testimony to lawmakers last week, Governor Kuroda said that in the fiscal year starting April 2019, the central bank would be thinking about exit from stimulus. That was the first time he’d made such a statement, and financial markets reacted sharply. This week, he clarified that stance, emphasizing that while the BOJ would probably be thinking about it at that point, that didn’t mean it would necessarily be moving to normalize policy next year.

Kuroda emphasized that weakening of stimulus is unthinkable before reaching the 2 percent inflation target. However, it’s unclear whether that statement is actually as emphatic as it sounds. While repeating the promise to keep increasing the size of the monetary base until 2 percent inflation was achieved and stable, he indicated that a change to interest rate policy could come before that point.

If inflation is rising, the BOJ may argue that it can raise nominal interest rates without affecting real interest rates, and thus a rate rise wouldn’t actually weaken stimulus. This question will likely be in focus again at Kuroda’s press conference after the policy board completes a two-day meeting on Friday.

Here are the main points of what Kuroda said:

  • The BOJ will consider its exit strategy around fiscal 2019 if inflation hits 2 percent as the BOJ now forecasts.
  • It’s unlikely for the BOJ to consider exit in the fiscal year that begins next month.
  • It’s unthinkable for the BOJ to weaken stimulus before reaching the price target.
  • It’s possible to adjust the yield-curve control policy before attaining the price target.
  • It’s too early to talk now about how the BOJ exits.
  • The balance sheet and interest rates will be the key tools to consider when unwinding stimulus.

Wakatabe, the reflationist

Masazumi Wakatabe, an academic economist who has previously called for more stimulus, refused repeated requests from lawmakers to say what policy he thinks the BOJ should follow. Instead, he pledged to support the governor, prompting some economists to see a low chance of his dissent from a majority in his first meeting in April.  

  • He will propose further stimulus if it’s hard to hit price target.
  • It’s impossible to begin exit before reaching the price target.
  • There are no theoretical limits to monetary policy, but if there are limits in reality these depend on the policy framework and time frame.
  • There are still many assets the BOJ could purchase -- he noted that 60 percent of JGBs are not owned by the central bank.
  • The BOJ’s policies haven’t suppressed the profits of Japanese banks much yet.

Amamiya, the veteran

Masayoshi Amamiya, who’s a senior official at the bank, regaled lawmakers with his experience of fighting deflation, having worked at the BOJ for the whole of his adult life. Unlike Wakatabe, Amamiya conceded that there are limits to monetary policy and he noted that the BOJ’s policies are negatively affecting private banks. He expressed confidence that the BOJ can manage an exit from stimulus, and laid out some tools it would use.

  • Raising interest rates without destabilizing the market is possible when the BOJ exits.
  • Negative interest rates are a burden for private banks.
  • While he will express his opinion, he sees his role as to support the governor.
  • Hitting the price target has been harder than the bank initially thought.
  • There are limits to what any policy can do.
  • The effect of surprises in policy changes doesn’t last long.
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