Business Standard

BOJ hoses down market speculation of early stimulus exit


Reuters OITA/TOKYO, Japan
By Leika Kihara and Tetsushi Kajimoto
OITA/TOKYO, Japan (Reuters) - The Bank of Japan ramped up efforts to dispel market speculation of an early withdrawal of its massive stimulus, boosting its bond buying plan on Wednesday and reassuring markets that monetary policy will remain ultra-loose given meagre inflation.
BOJ Governor Haruhiko Kuroda and his deputy Kikuo Iwata on Wednesday stressed the bank will maintain "powerful" easing with inflation far from its 2 percent target.
Iwata blamed market misunderstanding of BOJ policy for driving up the yen more than he expected, saying investors were wrong to assume the central bank will soon raise rates.
"If economic conditions change, it's important for the BOJ to be ready to adjust its yield targets looking at economic, price and financial developments," Iwata told a briefing in Oita, southern Japan.
"But we're not in a situation to change our yield target levels now and I don't expect any changes for the time being."
A summary of BOJ policymakers' opinions, released on Wednesday, quoted one of them as saying at January's rate review that a rise in market expectations for an imminent departure from monetary easing would be "undesirable".
The cautious views of the inflation outlook came despite signs of economic strength, with data out on Wednesday showing factory output grew in December at the fastest pace in eight months on robust global demand for Japanese goods.
Subdued inflation and the strengthening economy pose a dilemma for the BOJ, which is forced to maintain its radical stimulus programme despite side-effects such as the drag on bank profits from ultra-low borrowing rates.
Signalling its resolve to keep rising global bond yields from pushing up Japanese yields, the BOJ on Wednesday increased the amount of Japanese government bonds (JGB) with three to five years to maturity it will buy in regular market operations.
The BOJ's announcement pushed the dollar up to an intraday high of 109.095 yen, though it later pulled back below 109 yen. The 10-year JGB futures price ticked up to 150.26 from around 150.20 following the announcement.
Under a yield curve control (YCC) policy, the BOJ guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent.
Kuroda has struggled to tame market speculation that the BOJ may follow in the footsteps of U.S. and European peers in heading for an exit from crisis-mode policy, fuelled in part by Japan's brightening recovery prospects.
Complicating this task is a growing chorus of policymakers in the BOJ board looking at an exit from ultra-accommodative policy, the summary of debate at January's rate review showed.
"If the economy and prices continue to improve, the BOJ may need to consider adjusting its yield targets to make its policy framework more sustainable," one board member said.
Even Iwata, a vocal advocate of aggressive easing, said BOJ efforts alone won't be enough to hit 2 percent inflation and urged the government to remove barriers that hamper competition.
"Government steps, as well as appropriate monetary policy, are necessary to achieve price stability with sustained economic growth," said Iwata, whose five-year term ends in March.
These remarks run counter to Iwata's earlier view that central banks are primarily responsible for accelerating inflation and can do so as long as they print money fast enough.
Iwata is seen as an architect of the BOJ's huge asset-buying programme, dubbed "quantitative and qualitative easing" (QQE) that aimed to shock the public out of a deflationary mindset.
The departure of Iwata, who said he was "quite sure" he wouldn't be reappointed, would symbolise an end to the BOJ's radical monetary experiment.
Iwata's exit could also raise the odds of the BOJ dropping its loose pledge to buy bonds at a pace that increases its holdings by 80 trillion yen ($735 billion) a year, an assurance made obsolete by the pace already slowing to almost half that level.
"In a country like Japan where inflation expectations aren't anchored at the central bank's target, it's hard to fight big headwinds," he said, blaming a sales tax hike in 2014 and slumping oil costs for delaying the achievement of 2 percent inflation.
While YCC can reflate growth, it lacks the power to change public perceptions of future price moves, Iwata said, urging the government to keep fiscal policy accommodative and speed up structural reforms.
"The BOJ doesn't have the means to boost inflation expectations alone. That's why all three arrows of 'Abenomics' must be reflationary," he said in the final speech of his term.
($1 = 108.8900 yen)
(Reporting by Leika Kihara; Editing by Sam Holmes and Eric Meijer)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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First Published: Jan 31 2018 | 1:00 PM IST

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