BOJ maintains monetary easing policy, upgrades economic appraisal

Kyodo, Bloomberg

The Bank of Japan pledged to adjust its unprecedented stimulus program as needed after a jump in bond yields that highlighted risks linked to policymakers’ campaign to revive the world’s third-largest economy.

BOJ Gov. Haruhiko Kuroda told reporters in Tokyo that the central bank will conduct its debt purchases in a flexible manner, and that the recent volatility in government securities isn’t yet affecting the economy. He spoke after the BOJ board affirmed its plan to double the monetary base in two years as it seeks to end 15 years of entrenched deflation.

The biggest surge in government debt yields in five years threatens to undermine the BOJ’s stimulus, with companies including steelmaker JFE Holdings Inc. pulling bond sales amid the tumult. The prospects of a growth rebound and the emergence of inflation has contributed to sending the rate on 10-year bonds up more than a quarter percentage point in two weeks.

“Kuroda believes he should basically stick to the bold easing line he has already dictated, rather than altering course because of bond market moves,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo.

The BOJ also said it will maintain its current aggressive monetary easing policy aimed at beating deflation and upgraded the country’s economic assessment, at a time when consumption and exports have started to recover, backed by a weakening yen and rising stocks.

Lifting the economic assessment for a fifth month in a row, the central bank said, “Japan’s economy has started picking up,” revising upward its description at the previous policy meeting on April 26 that said it “has stopped weakening and has shown some signs of picking up.”

According to a statement released after a two-day meeting, the nine-member Policy Board unanimously agreed that the BOJ will increase the monetary base at an annual pace of around ¥60 trillion to ¥70 trillion, in line with measures announced in April.

The policy measures announced April 4 to achieve a 2 percent inflation target in about two years also include additional purchases of government bonds and riskier financial assets, such as exchange-traded funds.

“Exports have stopped decreasing as overseas economies have been moving out of the deceleration phase that had continued since last year and are gradually heading toward a pickup,” the BOJ said in the statement.

The bank also said capital investments continued to show strength in the nonmanufacturing sector and appeared to have stopped weakening on the whole. Consumption has appeared increasingly resilient, supported by improving consumer sentiment, it added.

On prices, it noted that “some indicators suggest a rise in inflation expectations,” although the year-on-year rate of change in the consumer price index excluding fresh foods has been negative.

The BOJ said the CPI is expected to “register smaller declines for the time being, and thereafter is likely to gradually turn positive.”

On the outlook of the economy, the BOJ said it is “expected to return to a moderate recovery path” as domestic demand remains firm due to the effects of monetary easing and various economic measures, as well as a gradual pickup in growth of overseas economies.

The Policy Board probably discussed the impact of rising long-term interest rates after the yield on the key 10-year Japanese government bond hit 0.920 percent last week, its highest level since April 2012, on selling partly triggered by firmer Tokyo stocks.

Rising long-term interest rates could lead to an increase in mortgage interest rates as well as on loans for companies, and that could be an impediment to an economic recovery.

In New York on Tuesday, New York Federal Reserve Bank President William Dudley said the BOJ’s aggressive monetary easing policy, which has helped drive the yen sharply lower against major currencies, has been effective so far.

“Based on what’s happened over the last few months, I’d say that the policy is working quite effectively,” Dudley told an audience at the Japan Society in Manhattan.

While calling the BOJ’s action “very good,” he said a “big question” still remains about the so-called third arrow of structural reforms under Prime Minister Shinzo Abe’s economic policy. “Abenomics” focuses on the three pillars of monetary easing, flexible spending and yet to be realized structural reform.