Kuroda pushes through changes, keeps QE

The BoJ took a number of steps to alleviate the strain on banks and the market distortions stemming from its policy


TOKYOBank of Japan (BoJ) governor Haruhiko Kuroda pushed through changes to his radical monetary stimulus programme as the central bank prepares for a longer struggle to stoke inflation.

While keeping unchanged its two major benchmarks — the negative interest rate and 10-year yield target — the BoJ took a number of steps to alleviate the strain on banks and the market distortions stemming from its policy. Yet, Kuroda also indicated that the BoJ will tolerate 10-year yields deviating as much as 0.2% from zero, compared to 0.1% now.

The BoJ cut its inflation forecasts, showing it’s preparing for an even lengthier battle to generate 2% price gains, further widening the gap with global peers who are moving away from crisis-era policies. The headline of the BoJ’s statement underscored the goal: “Strengthening the Framework for Continuous Powerful Monetary Easing”.

“The BoJ is now more engaged and prepared to fight a long-run battle against deflation or disinflation,” said Shigeto Nagai, head of Japan Economics at Oxford Economics.

Japan’s benchmark 10-year yield sank four basis points to 0.062%, the lowest in more than a week. The Japanese yen decreased 0.3% to 111.39 per dollar, the weakest in more than a week.

The Topix stock index sank 0.8% to the lowest in a week on the biggest decrease in almost four weeks. Japan’s currency and bond yields had strengthened leading into the meeting on market speculation the BoJ would adjust its policies.

Key Points

Negative interest rate of -0.1% maintained, but will apply to fewer reserves to cushion the impact on commercial banks. Target yield for 10-year bonds remains 0%, while BoJ will now tolerate deviation from this by as much as 0.2%. Forward guidance added to these policy rates, with a commitment to keep the current extremely low levels for short-and long-term interest rates for an “extended period of time”.

Overall purchases of exchange-traded funds are kept at ¥6 trillion (RM216 billion), but those linked to the Topix will increase to ¥4.2 trillion, from ¥2.7 trillion, further reducing the weighting of the narrower Nikkei 225.

As the side effects of its policies piled up, the central bank faced pointed questions about how long it could keep them in place. Inflation remains less than halfway to the target after more than five years of extraordinary stimulus.

The BoJ added language to its bond buying programme stating that “the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices”.

Speculation that policy tweaks were afoot increased as traders awaited the announcement, which finally came at 1:03pm in Tokyo yesterday — the latest since the yield-curve control programme was introduced in September 2016.

Inflation Outlook

The central bank now sees core consumer prices rising just 1.1% in the current fiscal year through March, down from 1.3% projected previously. The estimate for fiscal 2019 was cut to 1.5%, from 1.8%, while fiscal 2020 was trimmed to 1.6%, from 1.8%.

The new forecasts show the BoJ’s struggle to stoke inflation, while its peers in the US and Europe normalise policy. The US Federal Reserve last month raised interest rates for a sixth time in 18 months and set a steeper rate-hike trajectory, while the European Central Bank has plotted the end of its asset purchases this year.

“They tried their best to avoid the perception of tapering or normalisation by introducing the forward guidance,” said Nagai. “The guidance is vague but gives some assurance that the current easing measures will continued at least into fiscal 2020, after checking the side effects of the planned consumption tax hike.” — Bloomberg