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BOJ’s Miyao confident on 2% inflation goal

Kyodo

A Bank of Japan policymaker said Thursday that the central bank’s experimental quantitative easing measures will bolster the economy and push up prices, expressing confidence that its 2 percent inflation target can be achieved.

“The 2 percent inflation target is expected to be attained as a sustainable economic recovery could boost prices in a well-balanced manner,” BOJ Policy Board member Ryuzo Miyao said in a speech in Gifu.

Earlier this month, the BOJ embarked a quantitative easing regime that jacks up its purchases of longer-term government bonds and risky financial assets, including exchange-traded funds and real estate investment trusts, to flood the economy with cash and spur lending.

Miyao said the measures are likely to weaken the yen, drive up stocks and drive down long-term interest rates, which could prompt companies and households to beef up spending and investment, “exerting a positive impact on the economy and prices.”

The consumer price index is expected to rise above 1 percent in fiscal 2014, he said.

Miyao, however, admitted that the BOJ’s experiment could temporarily backfire by making the financial markets “unstable” by luring more investors into accepting excessive risk.

To ensure the temporary economic growth takes place, the central bank will “closely monitor risk factors such as market developments as well as economic and price conditions” in steering monetary policy.

Miyao is known as one of the biggest proponents of aggressive monetary easing on the nine-member Policy Board. He argued that the bank should stick to the price goal more strongly even before Haruhiko Kuroda, an advocate of drastic easing, became the BOJ’s chief on March 20.

The latest data shows that the economy grew at an annualized rate of 0.2 percent in the final three months of last year, in inflation-adjusted terms, marking its first expansion in three quarters.

However, the core consumer price index, excluding fresh food, fell 0.3 percent in February from a year earlier, logging the fourth straight month of decline and underscoring that Japan remains mired in a deflationary trend.

Swap market stirs

Bloomberg

The domestic swap market is already starting to anticipate Bank of Japan Gov. Haruhiko Kuroda’s endgame even as he makes his first monetary easing moves.

Two-year overnight-index swap rates that reflect investor expectations for the central banks’s benchmark rate are set for the biggest monthly jump since November 2010 and reached 0.095 percent this week.

The contract has climbed from a low of 0.039 percent in January to the highest since July 2011, approaching the 0.1 percent upper range of the BOJ’s benchmark rate target. The comparative rate in the U.S. was at 0.163 percent.

“Because the BOJ is providing a large amount of funds, rates may fall in the near term, but it’s more natural to think rates will rise in the future,” said Masaru Hamasaki, a senior strategist in Tokyo at Sumitomo Mitsui Asset Management Co.. “Overnight index swaps signal future rates, so it makes sense for them to go higher.”

The swaps suggest investors are growing more confident Kuroda will drive inflation toward the 2 percent goal even as skeptics from Bill Gross, who runs the world’s biggest bond fund, to former BOJ Deputy Gov. Kazumasa Iwata question whether it can be achieved. A measure of consumer-price expectations in Japan was at the highest on record after the central bank announced on April 4 it will double its holdings of government bonds and stock funds to end deflation and spur economic growth.