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Free AccessREPEAT: 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
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.