REPEAT: MNI STATE OF PLAY: BOJ Keeping Policy for 2% CPI, Yen

By Max Sato

     TOKYO (MNI) - The recent public remarks and unnamed board opinions indicate

Bank of Japan policymakers will maintain the nearly flat and low yield curve for

months to come, despite speculation that the central bank is testing the water

for an eventual tapering.

     At the same time, as currency traders are testing the downside of the

dollar/yen exchange rate, all BOJ officials can do is to repeat their mantra

that the central bank is fully committed to achieving its 2% inflation target by

persistently implementing monetary easing, which they hope will keep yen bulls

at bay, MNI understands.

     BOJ Governor Haruhiko Kuroda on Tuesday vowed to continue monetary easing

until 2% inflation is anchored, dismissing the suggestion that the bank may

scale back its large monetary stimulus as the economy recovers and inflation

expectations pick up.

     "There is still considerable distance toward achieving the 2% inflation

target," Kuroda told a news conference after the bank's two-day policy meeting.

"We are not at the stage of considering an exit from monetary easing."

     Despite the BOJ's no-change policy decision and the flat denial by its

governor of the need to even discuss a future tapering, the dollar slipped below

Y110 overnight.

     "It shows you market players wanted to seek a firmer yen whatever the BOJ

said or decided. The move is based on position talk. There seem to be

accumulated euro longs," a person who is familiar with BOJ thinking said.

     --EASING DESIGNED TO KEEP YEN WEAK

     The BOJ wants to avoid a sharp yen rise as it lowers exporter profits,

dampens domestic stock markets and exerts downward pressure on consumer prices

through lower import costs.

     Large-scale easing began in April 2013 and has transformed from targeting

the amounts of asset purchases to the level and shape of the domestic bond yield

curve.

     All along, by maintaining its easing stance or reinforcing it, the BOJ has

indirectly helped keep the yen relatively weak, buying time while the government

embarks on structural reforms that should raise the economy's growth potential

and support the path toward stable 2% inflation.

     The latest forex move followed yen buying about two weeks ago, when the

dollar slumped to around Y111.75 on Jan. 11 from above Y113 two days earlier in

the absence of any change in monetary policy stances in either the U.S. and

Japan. The dollar was quoted around Y109.65 Wednesday.

     On Jan. 9, the BOJ reduced the scale of its purchase of super long-term

JGBs to prevent a further drop in bond yields caused by tight supply and demand

conditions.

     However, this move was interpreted by some market participants to mean that

the BOJ might be considering tapering and caused the yen to appreciate.

     But Kuroda said the phenomenon was a weaker dollar against the euro and

other currencies and not a stronger yen.

     Throughout Tuesday's news conference, the governor stressed that it is too

early to even begin discussing how the bank should unwind its large monetary

easing program.

     On Tuesday the BOJ slightly upgraded its assessment of inflation

expectations as the board has judged the price outlook among firms and

households has stopped falling.

     "Inflation expectations have been more or less unchanged," the BOJ said.

Previously, it said inflation expectations had been "in a weakening phase."

     In theory, when inflation expectations rise, real interest rate will fall

and reinforce the effects of monetary easing. That would raise speculation that

the central bank would adjust the degree of its easy policy.

     --TOO EARLY TO SHIFT POLICY

     But Kuroda told reporters, "I don't think we need to change the yield curve

control target at all when inflation expectations rise."

     In response to questions, Kuroda repeated that the BOJ's operations to buy

Japanese government bonds don't indicate any future policy stance.

     "The scale of bond buying rises and falls, depending on developments in

interest rates, as the BOJ is buying bonds to form an ideal yield curve," he

said.

     Kuroda also said he doesn't see the need to review the scale of the BOJ's

massive purchases of ETFs (exchange-traded funds), currently at Y6 trillion

annually, even though the uncertainty over global growth is easing.

     "ETF buying is part of the policy framework for achieving the 2% price

target," he said, "ETF buying is aimed at lowering risk premiums and it is

currently playing a major role."

     The summary of opinions expressed by BOJ board members at their Dec. 20-21

policy meeting showed that some board members cautioned against keeping large

monetary stimulus for too long.

     "Amid the situation of the inflation rate increasing toward 2% and the

economy's medium- to long-term growth potential rising going forward, the

effects of monetary easing measures will be enhanced," one member said. "In

conducting monetary policy, it will be necessary to take into account such

changes in the environment as well as the side effects of the measures."

     A different member also warned, "With regard to the purchases of risky

assets including exchange-traded funds (ETFs), given that stock prices and

corporate profits have substantially improved and are expected to continue to

develop firmly going forward, their policy effects and the possible side effects

should be examined from every angle." the summary said.

     Kuroda said the need to review the bank's ETF purchases was a minority

opinion among the board.

     --CAUTION AGAINST MORE EASING

     It is believed that those warning comments may be partly aimed at board

member Goushi Kataoka, who is known for his reflationary policy stance and

appears to suggest more easing should be conducted when the costs can outweigh

the benefits of such a move by further squeezing profit margins for banks.

     Kataoka, who joined the board in July, dissented for the fourth straight

meeting this month, although he didn't formally propose any specific policy

action.

     He was quoted in Tuesday's policy statement as saying that if there was a

delay in the timing of achieving the price stability target due to domestic

factors, the BOJ should take additional easing measures and that it was

necessary to include that in the text.

     Kataoka also said the BOJ should try to hit the inflation target "in fiscal

2018," and that it was appropriate for the BOJ to purchase JGBs "so that yields

on JGBs with maturities of 10 years and longer would broadly be lowered

further."

     The BOJ decided Tuesday in an 8-to-1 vote to maintain its current monetary

easing stance, seeking to stabilize the 10-year JGB yield at around zero percent

and keep the overnight interest rate at -0.1%. It also maintained its

medium-term growth and inflation projections, repeating what many see as an

optimistic outlook that the bank can hit the inflation target "around fiscal

2019."

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