By ruling so many things out, the capacity for innovation will only get harder
By DANIEL MOSS / Pic BLOOMBERG
JAPAN’S central bank has been busy putting the finishing touches on a three-month monetary policy review. Not even its top two officials appear to agree on what will come out of it. Bond investors aren’t pleased.
Last week, governor Haruhiko Kuroda scotched speculation that the Bank of Japan (BoJ) would permit the yield on 10-year government bonds to trade in a wider band around the target of zero. He appears reluctant to sign off on any shift, however subtle, that might be interpreted as being comfortable with the concept of tighter monetary policy.
Days later, deputy governor Masayoshi Amamiya offered a different take.
The bank might still seek ways to allow additional fluctuations when the results of the review are unveiled on March 19.
The normally placid market for Japanese sovereign debt gyrated, suggesting traders had been prepared for rates to move higher if the governor allowed it. Because the BoJ steers market rates closely, such volatility is rare.
Rarer still is evidence of Kuroda and Amamiya differing publicly about something so key and so close to the finish line. What’s going on?
The mixed messaging is probably a signal that further easing is more likely to resemble tinkering than a revolution.
The review itself seems designed to convey the idea the BoJ can still do something without actually doing too much. This was the thinking behind the present framework of yield-curve control, which was born of a strategic review in 2016. It aimed to make policy more sustainable by not depending primarily on massive amounts of bond buying.
This time, officials have been talking down the prospect of major changes. Climbing global bond yields in recent weeks aren’t help- ing matters because they discourage experimentation.
It’s not exactly clear what’s left on the drawing board. When the review began in December, evaluating the BoJ’s progress looked like a good idea. Consumer prices had fallen the most in a decade the month before, kicking the prospect of reaching the 2% inflation target down the road. Japan was struggling to shake off the worst recession since the 1950s.
Speculation initially focused on the benchmark interest rate of minus 0.1%. Negative rates hadn’t done much to revive the economy, and regional banks had taken a hammering, so maybe it was time to phase it out. Kuroda quickly eliminated a shift on that front.
Attention then turned to whether the BoJ would let the 10-year yield dance around a little bit more. Currently, officials tolerate a move in a range of about 20 basis points around zero.
That sounds fine in principle, but with traders now betting on a stronger global economic rebound, the yield would likely move quickly to the top of any new range, testing the arrangement before the ink had dried.
No central bank wants to be challenged by the market — power depends to a degree on the perception of having it.
Lose a few battles, and that credibility can be awfully hard to claw back.
Beyond “Seinfeld”, it seems pointless to do a big show about nothing. That is why I am inclined to lean toward Amamiya’s perspective rather than Kuroda’s more forthright comments. It’s plausible that having analysed the response to Kuroda, his deputy was asked — or took it upon himself — to do a little damage control.
It would be a mistake to underestimate Amamiya’s role at the BoJ. He is no mere lieutenant. Having worked at the central bank since the 1970s, he is the guy in the engine room who knows the levers to pull. When he was appointed deputy governor in 2018, I likened him to Cardinal Richelieu.
Kuroda may also have been engaging in one of his periodic efforts to surprise investors. The governor used to manage Japan’s currency intervention at the Ministry of Finance when the
department was one of the biggest players in the market. He under- stands the tactical advantages of shock, stunning markets with the size of his first stimulus package as BoJ chief in 2013, and again when he unexpectedly expanded it the following year.
In a television interview with Bloomberg’s Francine Lacqua at Davos in January 2016, Kuroda gave no indication that negative rates were coming. They were unveiled days later.
The BoJ was the first major central bank to explore ultra-low interest rates and deploy quantitative easing, and is probably desperate to show it still has some moves.
Kuroda may well have something up his sleeve. But by ruling so many things out, the capacity for innovation will only get harder. Japan appears to have left the big initiatives in monetary economics behind it. — Bloomberg
- This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.