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BOJ chief's actions said more aggressive than Draghi's, Bernanke's

Kuroda’s strategy follows in footsteps of U.S., Europe

by Toru Fujioka

Bloomberg

Bank of Japan Gov. Haruhiko Kuroda has followed in the footsteps of his U.S. and European counterparts, Ben Bernanke and Mario Draghi, as he swung the central bank from incremental moves to unprecedented stimulus in his first policy meeting as chief.

The BOJ will double the monetary base by the end of 2014 through the purchase of government bonds, the central bank said, in the nation’s biggest round of quantitative easing. JPMorgan Chase & Co. said the BOJ and U.S. Federal Reserve are now “in the same camp” when it comes to monetary stimulus.

With the Fed, the European Central Bank and the BOJ now pulling in the same direction, the risk for Kuroda is that taking an activist role may fuel expectations for more measures that he won’t be able to deliver. The yen fell to its weakest since 2009 Friday and stocks surged for a third day as investors expect the new governor to revive an economy where prices are back at 1992 levels.

“A huge economic experiment is starting,” said Junichi Makino, chief economist at SMBC Nikko Securities Inc. “I see a risk that Kuroda will be the governor who proves the limit of monetary easing by doing everything that a central bank can.”

At stake is the credibility of Prime Minister Shinzo Abe’s economic program, dubbed “Abenomics,” and the chances of ending two decades of stagnation and meeting the BOJ’s 2 percent inflation goal.

“It’s true that the price target won’t be easy, but we can’t meet it by incremental easing,” Kuroda told reporters Thursday in Tokyo. “I’m confident that every essential measure is included in today’s decision.”

The BOJ set a two-year horizon for achieving its inflation target and said it was shifting its attention from the benchmark interest rate to the monetary base — cash in circulation and the money that financial institutions have on deposit at the central bank. It predicts the program will grow to ¥270 trillion by the end of 2014.

ECB President Draghi broke with his predecessor, Jean-Claude Trichet, by pursuing a more forceful campaign to end the eurozone debt crisis, declaring there aren’t “any taboos” for the bank. On Thursday, Draghi said that policy will stay accommodative for as long as needed. Federal Reserve Chairman Bernanke, meanwhile, has overseen more than $2 trillion in emergency aid, three rounds of asset purchases and record-low interest rates.

The ECB took five years from 2008 to achieve a near doubling of its balance sheet, as the BOJ is planning, while Bernanke boosted the Fed’s by more than 150 percent in four months during the global financial crisis.

“Kuroda is easing more than Draghi,” said Shuichi Obata, senior economist at Nomura Securities Co. “He’s also buying more risky assets, such as exchange-traded funds, so in that sense he’s more aggressive than Bernanke.”

Kuroda’s predecessor, Masaaki Shirakawa, failed to end price falls in a term marred by three recessions, leaving the economy smaller than when he took office. The Nikkei 225 stock average soared to a four-year high when Shirakawa announced he was stepping down, and stocks jumped 2.2 percent Thursday.

The world’s third-biggest economy grew an annualized 0.2 percent in the last three months of 2012 following two straight quarterly contractions. Excluding fresh food, prices haven’t risen 2 percent in any year since 1997, when the consumption tax was increased. In February, they fell 0.3 percent.

By abandoning an interest rate target in favor of the size of the monetary base, Kuroda is digging into a similar toolkit as that used by Paul Volcker, who became chairman of the Fed in 1979 with the opposite task: to break the back of inflation that was too high.

The Fed targets a near-zero rate for overnight interbank loans even after shifting its focus four years ago to buying bonds and boosting the size of its balance sheet.

The BOJ’s 2 percent inflation target echoes the Fed’s adoption of a 2 percent goal in January last year. Bernanke told lawmakers in Washington on Feb. 26 that he supported Japan’s efforts to exit deflation.

“Kuroda is very mindful of the Fed, he wants to catch up,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. in Tokyo. “He is trying to lift Japan’s economy by keeping the yen weak, boosting stocks and improving sentiment.”

Kuroda’s pledge last month to do “whatever it takes” to end deflation came after Draghi made the same vow last year in relation to saving the euro.

The BOJ Policy Board agreed Thursday to temporarily suspend a cap on bond holdings and dropped a limit on the maturities of debt the bank buys. The BOJ will purchase ¥7.5 trillion in bonds a month along with more risk assets, a shift that Kuroda said will mean buying the equivalent of 70 percent of government bond issuance.

The bank will acquire more than ¥150 trillion in bonds, exchange-traded funds and other securities through the end of 2014 — more than triple the balance sheet increases in two previous periods of easing. Japan’s monetary base was at a record level in March after rising by more than 50 percent in five years.

Not everyone is confident that Kuroda’s plan will work. Former BOJ board member Atsushi Mizuno last month said more bond purchases could create a market bubble, while Kazumasa Iwata, a former deputy governor, deemed Kuroda’s two-year goal impossible.

“There isn’t much room left for Kuroda to expand bond purchases. With the easing, the ball is back in the government’s court,” said Takahiro Sekido, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. who formerly worked at the BOJ.

In December, Abe led his Liberal Democratic Party to electoral victory by pledging to fire “three arrows” to end stagnation: monetary stimulus, fiscal spending and cutting regulation to increase investment and hiring.

An aging population and a government debt over twice the size of Japan’s GDP are major constraints, while the yen’s decline since November is swelling the cost of fuel imports while nuclear power plants remain shut down indefinitely. And sales tax hikes set for 2014 and 2015 may damp consumption.

“There has to be increased lending by banks, and I think firms need to start believing that they need to raise prices,” said Izumi Devalier, Japan economist at HSBC Holdings PLC in Hong Kong. “(Kuroda) is hoping that the mindset of economic participants will change.”

  • junia

    Kuroda’s strategy is “quite dangerous”, according to George Soros. The fate of Japanese citizens now depends on a risky manipulation of money game?! No thanks! Real economy please!