MNI ANALYSIS: BOJ Kuroda Offers No Fresh Insights Into Exit

--Logical To Debate Exit in Fiscal 2019 But 2% CPI Target Elusive

By Hiroshi Inoue

     TOKYO (MNI) - Recent remarks by Bank of Japan Governor Haruhiko Kuroda

offer no fresh insights into the bank's eventual exit from large-scale monetary

easing.

     The BOJ board's timeframe of guiding low inflation to a stable 2% remains

an elusive target.

     Kuroda's comments at a Diet committee on Friday on the possibility of

discussing an exit strategy "around fiscal 2019" were based on what many

economists consider an overly optimistic outlook, that annual inflation will

reach 2% around that time from just under 1% now.

     The governor has been saying the board will debate ways to unwind massive

asset purchases aimed at keeping very low interest rates if prices continue to

rise toward the bank's 2% target, but that "it would not be appropriate to

discuss the specifics at this point" as it would confuse market participants.

     He basically repeated these points at his confirmation hearing at the Lower

House Steering Committee on Friday for his reappointment to a second five-year

term as BOJ governor.

     Kuroda didn't say how the bank should reduce large monetary stimulus. He

has often said whether it should raise interest rates first or trim asset

purchases first will depend on the economic and financial conditions at the

time.

     --LOGICAL THINKING

     However, he did say when the board was likely to discuss any exit plans but

it was a logical conclusion from the latest, often-delayed timeframe of

achieving 2% inflation.

     "I'm convinced that it will reach 2% around fiscal 2019," Kuroda said,

repeating his earlier remarks.

     "Naturally we will be debating an exit around that time."

     At the same time, Kuroda also told the committee that discussing the issue

at this point would confuse the markets.

     "We will begin debating an exit strategy as we get close to the exit,

seeking necessary communication with the markets," he said.

     But the timing of such debate depends on how steadily the core consumer

price index (excluding fresh food) will rise toward the 2% target.

     The national average core CPI rose 0.9% on year in January, led by gradual

gains in goods prices, while service prices remained weak, largely due to slow

wage hikes and regulated healthcare costs.

     The core-core CPI (excluding fresh food and energy) rose just 0.4% on year

in January, indicating that it takes considerable time for the underlying

inflation trend to pick up and that the recent increase has relied heavily on

higher fuel and utility costs.

     --FRAGILE 2% TIMEFRAME

     The estimated timing of hitting the 2% target, which has been delayed six

times, may be pushed back again from "around fiscal 2019" as inflation remains

slow to respond to sustained economic growth.

     Kuroda's comments on Friday didn't imply his views have changed that the

BOJ needs to maintain aggressive easing launched nearly five years ago and that

it's premature to discuss any exit strategy as Japan is still far from the 2%

price stability target, people who are familiar with BOJ thinking said.

     "It is very unlikely" that the BOJ would have no discussion on how to

unwind easing "around fiscal 2019" if the annual inflation rate was reaching 2%

around that time, one of the people said.

     But he reminded that the BOJ would be still continuing easing even if

inflation touched 2% because it must ensure inflation is well anchored around

that level and not slipping back to deflation.

     --YEN RISE RISK

     BOJ officials were not surprised to hear Kuroda's latest comments, which

they thought were "logical," but they are concerned about a further appreciation

of the yen after the currency firmed on his comments, according to two people

who are familiar with BOJ thinking.

     The BOJ doesn't have effective tools to stop a sharp rise in the yen, which

would hurt exporter profits and dampen overall business sentiment. While a

stronger yen raises Japan's purchasing power, it will also lower import costs,

exerting downward pressure on CPI.

     But to be fair with Kuroda, the dollar was already shaky before he spoke at

the Diet committee, hit by the announcement by U.S. President Donald Trump that

he would impose stiff tariffs on imports of steel and aluminum and keep them

"for a long period of time."

     The dollar traded around Y105.65 in Asia on Monday after falling to Y105.26

in New York on Friday for the highest level since November 2016.

     The current yen level is much stronger than Y110.18, the average of the

dollar/yen exchange rate forecasts for fiscal 2017 provided by large

manufacturers polled in the BOJ's latest quarterly Tankan business sentiment

survey released in December.

     Nobody knows for sure as to whether Kuroda had any intention when he made

the comment on the possibility of discussing an exit strategy "around 2019."

     BOJ officials believe he simple had to provide some information to the

members of the Diet committee as they kept pressuring him to comment on any exit

guidelines that the BOJ board might have, according to the people who are

familiar with BOJ thinking. 

     In the past, lawmakers urged the BOJ to maintain the easy policy to

completely overcome deflation, but these days, some of them are calling on the

bank to consider unwinding the easing program as it is squeezing profits for

lenders and slashing returns on fixed-income investments by pension fund

managers.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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