With its reluctance to add to record monetary stimulus even as inflation remains well below its target, the Bank of Japan has stoked speculation about it scaling back its asset purchases as soon as early 2016.
Economists in recent weeks have been re-examining the BOJ’s stated goal of keeping its “quantitative and qualitative” easing program as long as needed to maintain stable 2 percent inflation. Barclays PLC analysts highlight that the pledge doesn’t specify continuing with the current pace of asset purchases.
Few analysts see consumer prices rising at a sustained 2 percent pace starting next year — that’s a rate that Japan hasn’t consistently maintained since the early 1990s. Yet Morgan Stanley MUFG Securities Co. is among those who now predict the BOJ will cut back on stimulus in 2016, with Nomura Holdings Inc. and Credit Suisse Group AG seeing it in the first half of the year.
“We cannot predict from the statement alone just what form an exit strategy will take for what level of CPI growth,” Akito Fukunaga and Naoya Oshikubo, Tokyo-based rates strategists at Barclays, wrote in a note on Wednesday.
Gov. Haruhiko Kuroda himself has repeatedly said it’s too early to discuss an exit strategy, a judgment he reiterated in the Diet on June 22. Last month, he said that premature discussion of an exit policy would confuse the market.
Those remarks may not rule out sustaining the stimulus program at something other than the current ¥80 trillion ($646 billion) annual increase in the monetary base.
“What the BOJ has said it will continue until it achieves stable 2 percent inflation is the QQE framework, not the present purchasing volume itself,” the Barclays analysts wrote. “Thus, it will shift from a policy utilizing its massive balance sheet back to a policy using interest rates as an operational variable when its 2 percent price stability target is realized in a stable manner.”
The BOJ last October expanded the stimulus program that Kuroda introduced in April 2013 in a bid to drive inflation to 2 percent. “The Bank will continue with QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner,” the BOJ said in a statement on June 19.
While its main gauge shows consumer price gains stalling, the bank has released research concluding that the reflation strategy is succeeding in changing deflationary mindsets.
Even if inflation doesn’t pick up to the BOJ’s goal in its time frame of around the six months through September 2016, a boost in stimulus wouldn’t be necessary as long as an upward price trend toward the target is in sight, Yutaka Harada, a board member who is known as a reflationist, said in an interview on June 4.
An absence of further monetary stimulus could sharpen the focus on Prime Minister Shinzo Abe’s progress on growth steps for the economy and his administration’s pressure on companies to deploy more of their cash and record profits to boost wages and investment.
At the same time, Kuroda has a record of surprises. If there is more speculation about tapering rather than boosting stimulus, that could lay the groundwork for a large reaction in the market if the BOJ were to step up the pace of asset purchases.
“Kuroda loves surprises,” said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance Co. “You should always be aware of the potential for unexpected action by the BOJ.”