By Leika Kihara
TOKYO, June 19 (Reuters) - Bank of Japan Governor Haruhiko
Kuroda has no intention of blinking first in the face off with
Japan's markets over policy even as central bank officials grow
increasingly worried about price volatility.
A selloff in Japanese stocks, a sharp rise in bond yields
and a pullback in the dollar against the yen have raised doubts
about the effectiveness of the BOJ's big-bang stimulus programme
announced on April 4 and whether it will need to take further
action to revive the moribund economy.
But Kuroda wants the BOJ to ride out the market storm by
sticking to the central bank message that an injection of $1.4
trillion into the economy over two years will do the job of
reinflating the economy. The policy aims to turn around years of
deflation to achieve 2 percent inflation in two years.
The BOJ hopes the market volatility will be calmed as a pick
up in the economy persuades investors that monetary policy is
working, sources familiar with central bank thinking say.
"The BOJ has said very clearly it will not take incremental
action," a source said. "That doesn't mean the BOJ will not act
when needed. But it does mean it won't act easily."
Kuroda said on Wednesday an important merit of monetary
policy is flexibility. But the sources, who spoke on condition
of anonymity because of the sensitivity of the subject, said the
BOJ has no new stimulus plan in the works, nor is it pondering
alternative measures beyond its current set of policies.
Any change in policy now would undermine Kuroda's message to
financial markets that the BOJ has moved away from the
incremental approach to policymaking that was heavily criticised
under his predecessor, they say.
To critics, the BOJ's rigid message suggests it lacks a
strategy on what to do next, especially as there are doubts even
within the BOJ that the central bank can meet its 2 percent
inflation target in two years - doubts shared by many
"By stressing it will not take incremental action, the BOJ
sacrificed the freedom to act flexibly in response to sudden
market shocks or other risks to the economy," said Masaaki
Kanno, chief Japan economist at JPMorgan Securities in Tokyo.
"It's also unclear what the BOJ plans to do once it becomes
evident Japan won't see 2 percent inflation in two years. Would
it step on the gas pedal again? The whole uncertainty is
contributing to the market volatility," he said.
The BOJ stimulus programme relies heavily on lifting
sentiment and confidence, so the reaction in markets is
Financial markets have rallied strongly since Prime Minister
Shinzo Abe first highlighted his brand of aggressive
policymaking late last year.
But Japan's benchmark Nikkei average is now lower
than it was when the BOJ announced its stimulus. The yen is now
stronger against the dollar, worrying exporters.
The sources said BOJ officials were particularly worried
about persistent swings in the Japanese government bond market
because it can curtail lending.
"When volatility is so high, companies may hesitate raising
funds from the market or making fresh investment," said a source
familiar with the BOJ's thinking. "It's unfortunate markets
haven't calmed down yet."
The yield on the benchmark 10-year bond fell
to a record low of 0.315 percent the day after the BOJ announced
its new monetary policy, which included a promise to keep yields
low by buying 70 percent of newly issued bonds.
But the scale of the buying jolted markets, crowding out
other buyers and prompting a rush to sell. By May 23, the
10-year yield had risen to a one-year high of 1.00 percent and
on Wednesday was around 0.8 percent.
On the other hand, data is showing signs of a pick up in the
economy, welcome news for Abe and Kuroda. In the latest sign, a
report on Wednesday showed exports rose in May at their fastest
pace in more than two years.
The BOJ is also hesitant to act anytime soon in case doing
so exacerbates the market volatility. Its big bond buying is
already blamed for destabilising the market, so increasing
purchases could risk yet greater volatility.
Some traders have also speculated that the BOJ may raise the
target for purchases of real-estate investment trusts, another
part of its monetary policy aimed at supporting prices. The BOJ
is close to its year-end goal of buying 140 trillion yen ($1.5
billion) in these investments.
Kuroda has already said there is not much room to boost
buying sharply given the relatively small size of Japan's REIT
market. Instead, the BOJ might opt to increase buying of
exchange-traded funds although it is hesitant to do so now as it
would expose its balance sheet to riskier assets.
The BOJ divisions over when Japan can achieve 2 percent
inflation are also preventing agreement on increasing the
central bank's tools for money market operations.
Last week, the nine-person board voted against extending the
maximum duration of cheap, fixed-rate cash offered by the BOJ to
two years from one year.
That would have made it easier for banks wrong-footed by the
spike in bond yields to hedge their portfolios, reducing their
need to sell bonds and potentially calming price swings.
Those opposed successfully argued the BOJ should not offer
0.1 percent money over two years if it expects inflation to be 2
percent at that stage. That would undermine the credibility of a
central part of the BOJ's policy.
To calm the bond market, the BOJ needs to send a clearer,
more consistent message on how it plans to guide policy beyond
its two-year timeframe, said Izuru Kato, chief economist at
Totan Research in Tokyo.
"The BOJ doesn't have a choice," Kato said. "It will quickly
face a dead-end if it reverts to the incremental approach as it
doesn't have enough policy options left to keep meeting market
(Editing by Neil Fullick)
All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of HedgeWorld content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. HedgeWorld is a registered trademark of Thomson Reuters.