Recent BOJ moves hint at end to ultraloose policy: analysts

by Yasushi Azuma

Kyodo News

Recent open market operations by the Bank of Japan have prompted analysts to speculate the central bank is set to lift its ultraloose monetary policy on April 11.

The BOJ set the maturity date of bill-buying operations offered at its head office Monday at April 5. It also offered bill-purchasing operations Wednesday at all of its offices with the maturity date set at April 4.

This suggests the BOJ could be planning to scrap the five-year-old cash-flooding stance on April 11 when nine BOJ policymakers wrap up a two-day meeting, according to Masuhisa Kobayashi, chief Japanese government bond strategist at Barclays Capital Japan Ltd.

Financial institutions that receive funds from the BOJ in the bill-buying operations are to pay back the funds on the maturity dates. They may need to lower their current account deposits to cover the sum if the BOJ does not offer fresh bill-buying operations, analysts said.

Under the quantitative easing policy, the central bank floods the financial system with liquidity by using the current account balance to anchor short-term interest rates near zero.

It is widely believed the BOJ will start reducing the current account balance target from the current range of 30 trillion yen to 35 trillion yen once the central bank announces it will switch back to the unsecured overnight call money rate from the current account deposits as a monetary adjustment tool.

Therefore, the latest BOJ move may be an attempt to lay the groundwork for a policy change to make it easier to lower the cash reserves set aside by financial institutions, analysts said.

“Although some government officials and ruling bloc lawmakers remain reluctant toward an early policy shift, there are nearly no objections in the private sector, including the banking industry, the insurance industry and business lobbies,” Kobayashi said.

Most BOJ watchers anticipate a policy change during either the April 10-11 meeting, or the one on April 28, but some still hold to the possibility of it occurring during the March 8-9 meeting.

BOJ Gov. Toshihiko Fukui told an Upper House panel Thursday that the year-on-year rate of change in the nationwide consumer price index is likely to stabilize above zero “very soon” and that the central bank plans to scrap the current policy immediately once its self-imposed conditions on the CPI are fulfilled.

Fukui’s latest comments raised speculation in financial markets that the BOJ could take action at the March policy meeting.

“We should also take into account the possibility of a policy shift at the March 8-9 meeting following the release of the CPI for January,” said Ryutaro Kono, chief economist at BNP Paribas Securities (Japan) Ltd.

Kobayashi said the BOJ will need more satisfactory economic data to make a final decision for a policy change.

The nationwide CPI for January is due out next Friday and that for February is due out March 31. The BOJ will also release its quarterly “tankan” business sentiment survey on April 3.

Many analysts forecast that the nationwide core CPI, excluding volatile perishable prices, will rise around 0.4 percent from a year earlier in January and that such a trend will continue until March.

The core CPI edged up 0.1 percent in both November and December from a year before, after staying flat in October.

The BOJ has pledged to maintain the quantitative easing until the year-on-year change in the core CPI stabilizes above zero.

“There are political pressures from the government and the ruling parties, but the BOJ will lose its credibility as a central bank in the market if it fails to act on its commitment,” Kobayashi said.

“Both the U.S. Federal Reserve Board and the European Central Bank have continued to raise interest rates in a businesslike manner regardless of political interference,” Kobayashi said. “Why can’t the BOJ do that?”

In an encouraging sign for the BOJ, it seems that the atmosphere in the government has also gradually changed from “absolutely no” to a forthcoming termination of the ultraloose policy to “reluctantly yes,” analysts said.

Prime Minister Junichiro Koizumi told reporters last week that it is up to Fukui as to when the BOJ will abandon the current monetary policy.

Economic and fiscal policy minister Kaoru Yosano also told a news conference Tuesday that the government and the ruling parties should respect its position on monetary policy as much as possible.

The BOJ adopted the ultraloose policy in March 2001 in an attempt to rescue the Japanese economy from falling into a deflationary spiral and restore stability in the financial system.