Bank of Japan Gov. Haruhiko Kuroda has shown that a single unprecedented expansion of monetary policy has more impact than a series of smaller steps, and economists say he’s preparing to prove it again.
The yen has tumbled almost 9 percent since Kuroda doubled monthly bond purchases at his first meeting as head of the BOJ in April last year. In contrast, the yen gained about 3 percent in the two years that started October 2010, when then-Gov. Masaaki Shirakawa introduced a smaller asset-purchase program that was expanded at least seven times before the central bank was pressured to conduct unlimited easing.
While Kuroda refrained from taking any extra step when policymakers concluded a two-day meeting Tuesday, economists predict that the central bank will double purchases of exchange-traded funds in coming months. The yen may decline further as the BOJ’s easing and the outlook for a rate increase by the Federal Reserve widen the gap between yields in the U.S. and Japan, according to analyst estimates.
“The BOJ still has room to surprise markets again,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. “If steps are taken little by little, investors aren’t convinced policymakers are serious. Kuroda’s method has been far more effective.”
The BOJ on Tuesday left unchanged its pledge to expand supply of money at a pace of ¥60 trillion to ¥70 trillion per year. Kuroda told reporters he is confident the central bank will achieve its target of 2 percent inflation and that he isn’t considering additional easing now.
The governor and his board members are scheduled to convene again on April 30, when they will release their latest forecasts on inflation and economic growth.
“There is already substantial monetary easing in the pipeline until year-end,” Marcel Thieliant, a Japan economist in Singapore at Capital Economics, wrote in a research note after the BOJ’s decision Tuesday.
Shirakawa first set up the ¥35 trillion asset-purchase program on Oct. 5, 2010, and expanded it by an average of ¥8 trillion to ¥91 trillion through Oct. 30, 2012, as the yen appreciated to a post-World War II record of 75.35 per dollar. The currency started to decline only after then-opposition leader Shinzo Abe called for unlimited easing on Nov. 15 that year, a month before he became prime minister.
Abe went on to nominate Kuroda and two BOJ deputies, who later consolidated the program with other bond-buying operations to enlarge the central bank’s balance sheet by about ¥130 trillion in two years through the end of 2014. They also abolished the restriction on maturities that the central bank buys. Japanese government bonds initially gained, with the benchmark 10-year yields falling to a record 0.36 percent and staying at or below 1 percent.
“Shirakawa was the guardian of the currency, whereas Kuroda is the guardian of bond yields,” said Satoshi Shimamura, the Tokyo-based head of rates and markets at the investment-strategy department of MassMutual Life Insurance Co. “The BOJ puts the entire yield curve under its control, but Kuroda may be feeling a limit to his future policy options.”
Growth in Japan’s consumer prices excluding fresh food quickened to 1.3 percent in February from negative 0.5 percent in March 2013, before Kuroda presided over his first policy meeting as governor on April 4 that year.
Though economists forecast the increase in the sales tax on April 1 will send Japan’s gross domestic product into contraction in the second quarter, yields in the U.S. are projected to rise, attracting funds from Japan and helping weaken the yen against the dollar.
The extra yield that investors can get by holding two-year U.S. securities instead of similar-maturity government debt in Japan will widen to 71 basis points by year’s end from 31, based on economist estimates.
Federal Reserve Board Chair Janet Yellen said the central bank may start to raise interest rates “around six months” after ending its asset purchases. The Fed will conclude the program in October, economists forecast.
“Two- and five-year notes will lead increases in U.S. yields as they reflect expectations of future rate hikes,” said Sho Aoyama, a senior market analyst in Tokyo at Mizuho Securities Co., a unit of Japan’s third-biggest financial group by market value. “Dollar-yen at 110 is a natural level to expect within a year.”