Bank's bond buys can't be seen as monetizing government debt

BOJ easing options limited



The Bank of Japan’s options to reinforce its monetary easing grip will probably be limited even if Asian Development Bank President Haruhiko Kuroda, a strong advocate of aggressive easing, takes the BOJ helm in March.

The government’s nomination of Kuroda, 68, apparently reflects its expectations for the former vice finance minister for international affairs to utilize his experience in leading an organization and his expertise as a financial diplomat to convey the bank’s policy stance to financial circles overseas.

Kuroda, who has headed the Manila-based financial institution since 2005, submitted his resignation Thursday, effective March 18, the ADB said.

Kuroda supports Prime Minister Shinzo Abe’s financial policies, including fighting chronic deflation by the introduction of a 2 percent inflation target.

He has also been critical of the BOJ’s monetary easing posture, saying the bank could carry out further monetary easing to help bolster the flagging economy.

“There are still a lot of assets within Japan that should be purchased,” he said in a recent interview.

Financial markets reacted positively to the government’s picks, including the nominations of Gakushuin University professor Kikuo Iwata, 70, who is also a strong advocate of aggressive monetary easing, and BOJ Executive Director Hiroshi Nakaso, 59, as the central bank’s two deputy governors.

After the personnel plan was reported, expectations for additional monetary easing steps to fight deflation lifted the dollar above the ¥94 line and subsequently boosted export-oriented shares in Tokyo to push up the Nikkei stock index by 2.43 percent to close at 11,662.52 on Monday.

“The BOJ is likely to adopt a more aggressive easing stance,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. “There’s expected to be some kind of additional easing measures in April to show ‘regime change’ in Japan’s monetary policy” as characterized by Abe.

“But Mr. Kuroda may gradually find out there aren’t many easing steps left for the central bank within several months after assuming the top post,” Kodama said.

He said buying government bonds through its asset purchase fund is likely to remain an effective easing tool, but the central bank also needs to avoid having its policy being perceived by others as monetizing government debts.

Yuichiro Nagai, a Barclays Securities Japan Ltd. economist, said the BOJ could up the scope of its purchases of government bonds, such as starting to buy bonds with a remaining maturity of up to 20 years from the current remaining maturity of up to three years.

Regarding risky assets, Nagai said the BOJ could buy more corporate bonds, but chances of purchasing foreign bonds have become slim, especially after the Group of 20 finance chiefs agreed in mid-February that the world’s major economies will not target exchange rates, affirming they should be determined by markets.

Abe’s ruling Liberal Democratic Party said in its policy platform for the Dec. 16 general election that it would set up a foreign bond purchase fund involving the government, the BOJ and the private sector.

But the prime minister said in a Diet session after the G-20 meeting that such a need is “receding,” suggesting he now believes the government has no intention to take direct steps to lower the yen, as the currency has been weakening, while indicating his government will stick to the agreement reached by the G-20.

On whether the BOJ can maintain its independence from political pressure, analysts said the government is first likely to wait and watch the progress in the BOJ’s efforts to attain the 2 percent inflation target after Kuroda and Iwata join the nine-member Policy Board.

Kodama of Meiji Yasuda Life said the inflation target itself would serve as a “convenient tool” for politicians to put pressure on the BOJ for more easing. “Regardless of whether there’s a revision to the BOJ Law or not, political pressure is expected to remain in place on the central bank,” he added.

Barclay’s Nagai also said, “The BOJ’s independence seems to be already harmed greatly at the point when the BOJ chief nominee was selected from the perspective of having the capability to carry out the prime minister’s policies.”