Kuroda plans huge bond binge for BOJ

Risky assets eyed; JGB buys to top total cash in circulation


Staff Writer

Bank of Japan Gov. Haruhiko Kuroda on Thursday revealed his strategy for ending more than a decade of deflation by expanding the central bank’s purchases of government bonds and allowing it to buy riskier assets.

The bank will “enter a new phase of monetary easing in terms of quantity and quality,” Kuroda said in explaining that the moves will double Japan’s monetary base and the amount of outstanding Japanese government bonds and exchange-traded funds within two years.

“This is coming from a different level in both quality and quantity,” Kuroda told reporters after the two-day Policy Board meeting. “We have put forward everything there is to do at this point,” he said.

The bar is set high for Kuroda, who has been tasked with ending the country’s chronic deflation.

The former chief of the Asian Development Bank said the BOJ will aim to expand the amount of outstanding JGBs by hiking purchases to an annual pace of ¥50 trillion.

Increasing the amount outstanding of the bank’s JGBs at an annual pace of ¥50 trillion will bring the current balance of ¥89 trillion to about ¥140 trillion by the end of 2013 and ¥190 trillion by the end of 2014.

It also will target longer-term debt, including JGBs with maturities as long as 40 years, as well as ETFs and real estate investment trusts, it said.

Tossed to the policy wayside, however, was the BOJ’s “bank note principle,” which caps the amount of long-term bonds in the BOJ’s possession to below the outstanding balance of bank notes in circulation.

Introduced in 2001, the bank note principle basically required that the BOJ ensure that the outstanding amount of long-term JGBs it effectively held be less than the outstanding balance of bank notes issued.

“If a central bank that holds such a large amount of government bonds were to purchase those bonds without making its fundamental principle of the purchases clear, increased uncertainties would create a risk premium and lead to a rise in yields on long-term government bonds,” former BOJ Gov. Masaaki Shirakawa said in a speech in 2011.

But Kuroda said the BOJ would not be able to reach the inflation target under that self-imposed rule, and thus the Policy Board agreed to temporarily suspend it.

With that limit out of the way, the BOJ will proceed to spend about ¥7 trillion a month buying bonds, allowing its JGB holdings to eclipse the money supply.

Kuroda said he’d allow this monetary experiment to run until the inflation target is met.

He also said the main target of the BOJ’s operations would switch from the uncollateralized overnight call rate to the monetary base, which will be fattened via money market operations to the tune of about ¥60 trillion to ¥70 trillion a year.

The adoption of a monetary base control was agreed upon “with the view of pursuing quantitative monetary easing,” the BOJ said.

Whereas the bank had adopted a virtually zero interest rate policy by maintaining the target for the uncollateralized overnight call rate at “around 0 to 0.1 percent,” the new operating target will aim to boost the monetary base so that it will increase at an annualized pace of approximately ¥60 trillion to ¥70 trillion. This will bring the amount outstanding in the monetary base from ¥138 trillion at the end of 2012 to approximately ¥200 trillion by the end of 2013 and to ¥270 trillion at the end of 2014.

“The incremental measures that had been taken previously cannot end deflation or help reach the 2 percent goal,” Kuroda explained.

Kuroda, who was appointed last month, had said he was confident the 2 percent inflation target could be reached in two years and said he would “do all there is to do” to achieve it.

But some, including his predecessor, Masaaki Shirakawa, warn that “excessive” monetary easing could be viewed as a hazard — that the central bank was financing the government.

That concern might bring the government’s resolve to pursue fiscal reform into doubt and cause long-term interest rates to spike, endangering the economy, some say.

Touching on such concerns, the bank said in a statement that JGB purchases “are executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits.”

“We have no intention” of financing the government, Kuroda told reporters, repeating that it is merely a way to reach the 2 percent inflation target.

On the outlook of the economy, the BOJ said it will likely return to a moderate recovery path due to pickup in growth rates of overseas economies and other factors. “In recent months, conditions in financial markets have turned favorable due to the abatement of global investors’ risk-aversion and expectations for domestic policies,” the bank also said.

Thursday’s meeting was also attended by economic revitalization minister Akira Amari. The BOJ Policy Board will convene for a meeting again later this month.

BOJ policy commitments spearheaded under Kuroda


The BOJ Policy Board:

• Pledges to achieve 2 percent inflation within around two years.

• Will increase long-term Japanese government bond holdings at an annual pace of ¥50 trillion to push down interest rates.

• Will buy government bonds of all maturities, including 40-year bonds.

• Aims to extend the average remaining maturity of the BOJ’s JGB purchases from less than three years to about seven years.

• Will invest ¥1 trillion in exchange-traded funds and ¥30 billion in real-estate investment trusts annually.

• Will introduce a new monetary easing scheme centered on integrating its two bond-buying programs into one.

• Vows to continue quantitative and qualitative monetary easing until 2 percent inflation is achieved in a stable manner.

• Will temporarily suspend the “bank note principle,” which requires the BOJ not to hold government bonds worth more than the value of bank notes in circulation.

• Will adopt the “monetary base” as the main operating target for money market operations, instead of the overnight call rate.

• Will conduct monetary market operations so Japan’s monetary base expands at an annual pace of about ¥60 trillion to ¥70 trillion per year. The monetary base is cash in circulation and the balance of current-account deposits held by financial institutions at the BOJ.

  • Saidani

    Let the backslapping and sake drinking at the BOJ begin as Kuroda/Abe just made saving a losing proposition. Spend your Yen now before it becomes worthless. At least that’s the plan to jump-start consumerism to levels never before seen in Japan. The most financially sensible, conservative families and the poor will suffer the most from higher taxes, commodity inflation, and the loss of purchasing power.

  • How can you not argue that this is not about financing a fiscal deficit. The argument would have to imply that there is something sustainable about the current economic settings. The interest rate strikes one as one such anomaly, be it a global one. How sustainable is it for Japanese pensioners to be earning 1% interest on their savings?

  • PX

    actually quite simple, if banks still refuse to lend out money, there will be no inflation. All of this BOJ buying bonds is really nothing as what they do is buy the existing bonds out there but at different interest rates. BOJ isn’t buying any new bonds–it is all the same money being tossed around. That isn’t going to do anything for inflation or increased wages, etc.

    To get inflation going, banks and companies gotta lend/spend. That is how inflation works.

    • Saidani

      When you weaken the Yen against the petro-dollar, you will get price inflation on energy, components for electronics makers and automakers, and anything else that needs oil in the manufacturing process or to be brought to market. Prices on imported goods will also rise. Japan imports 60% of it food supply. If wages do not rise commensurate with these price increases, the banks will not have to lend anything in order for the public to feel the pinch. As I said earlier, savers and those on the low end of the economic scale will hurt the most.

      • PX

        yes, that is if you weaken the yen. I am talking about circulating yen. If you just go ahead with monetary easing, you are not putting in new money into the market. It is still the same amount in absolute terms, only under different rates. And if you want wages to rise, banks/lenders are going to have to loosen the grip on the cash they are hoarding otherwise forget any wage rises.

  • Roan Suda

    As an economic ignoramus, I read this article until my eyes glazed over. I thank Andrew Sheldon-san and Saidani-san for helping me understand it, dreary as the news is for me as a pensioner–and an LDP supporter. Sigh…I suppose my wife and I should spend all our children’s inheritance. Fortunately or unfortunately, she won’t allow it.

    • Saidani

      If you saved money throughout your life and have amassed an inheritance to leave to your children, you are not an economic ignoramus. In fact, you understand economics perfectly well. It is the politicians and economists who have tried to game the economy for their own pleasure, creating complexity where none should exist, who are economic ignoramuses. Einstein said, “If you can not explain it to a six year old, you do not understand it yourself.”

  • junia

    Have your read or heard what the George Soros said in a CBS interview? I totally agree with him! We must halt the “dangerous” measures!!!