Business / Financial Markets | ANALYSIS

Japan's market eager for more hints on BOJ's next move

by Tomoyuki Tachikawa

Kyodo

Financial market participants have been anxious to get more hints on what the Bank of Japan will do next to spur inflation, as the central bank is widely expected to stand pat at its two-day policy meeting through Tuesday.

The bank decided at its September meeting to shift its policy target to the yield curve instead of quantitative easing, while effectively giving up achieving its 2 percent inflation goal during Gov. Haruhiko Kuroda’s tenure, which ends in April 2018.

Such moves have prompted many BOJ watchers to believe that the bank is unlikely to carry out additional monetary easing measures for the time being, as it appears to have finished preparing for a long-term battle to attain the inflation goal.

“We see a high likelihood that the BOJ will continue to preserve further monetary easing as a future option barring any major market shocks, such as a surge in the yen’s value,” said Naohiko Baba, chief economist at Goldman Sachs Japan Co.

Last week, Kuroda signaled that the BOJ will push back the time frame for hitting the inflation goal to sometime in or after fiscal 2018 from sometime in fiscal 2017. The bank has already pushed back the time frame four times since he took office in 2013.

In its quarterly outlook report scheduled to be released Tuesday, the BOJ may also cut its inflation forecast for fiscal 2017 through March 2018, from the 1.7 percent it projected in July.

The governor, meanwhile, indicated the BOJ will take no fresh action at its next Policy Board meeting, saying Japan’s economic situation is not so different from that in late September, when the bank held its previous policy meeting.

Analysts have started to wonder why BOJ policymakers see little need to implement further stimulus measures, although the central bank has acknowledged that inflation would not reach 2 percent in the near future.

“The BOJ has failed to communicate well with financial markets,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.

He said that since the rate at which consumer prices are rising is expected to remain low, the BOJ needs to explain more carefully why it would not make a move, adding, “Otherwise, speculation could grow that the BOJ is doing nothing as it cannot do anything.”

The bank is far from realizing the 2 percent inflation goal as Japan’s core consumer price index, excluding volatile fresh food prices, fell for the sixth straight month in August, down 0.5 percent from a year earlier.

Sources familiar with the central bank’s thinking, however, said BOJ officials are actually optimistic about the outlook for consumer prices at home.

The BOJ has argued that lower crude oil prices worldwide, tepid domestic demand in the wake of a consumption tax hike in 2014, and financial market instability had thwarted its efforts to attain the inflation goal for over three years.

Recently, oil prices have turned upward, especially after the Organization of Petroleum Exporting Countries agreed last month to cut oil output, and domestic demand has shown signs of picking up as labor market improvement could eventually lead to wage growth.

A possible near-term rate hike by the U.S. Federal Reserve may also weaken the yen against the dollar, helping push up consumer prices in Japan with import prices increasing. Japan depends on imports for over 90 percent of its energy needs.

“Consumer prices are set to rise after the beginning of the next fiscal year and they are certain to move toward 2 percent in the medium to long term,” one of the sources said.

Still, economists have doubts about whether the BOJ is prepared to cope with any financial market turbulence similar to the 2008 global financial crisis during the course of bringing back inflation.

“We are skeptical whether the BOJ has countermeasures against such negative shocks,” said Takeshi Yamaguchi, an economist at Morgan Stanley MUFG Securities Co.

Since the last meeting, the bank has modified the framework of its bond-buying program to keep the yield of the bellwether 10-year Japanese government debt at around zero percent, while leaving its negative policy rate unchanged at minus 0.1 percent.

Kuroda has said deepening a key negative interest rate would be a main policy tool as would cutting the target level of a long-term interest rate.

But Yamaguchi said the BOJ’s rate cuts, either long-term or short-term, would “raise concern about their side effects on the market.”

Indeed, the introduction of the new policy objective, which the BOJ calls “yield curve control,” was apparently aimed at alleviating the adverse impact of drastic monetary easing.

Further rate cuts by the central bank may cause a large plunge in interest rates, possibly hurting the profitability of companies in the financial sector.

“The bar for rate cuts looks very high,” Yamaguchi said.

A foreign exchange trader voiced fears that the yen could surge if the BOJ fails to convince market participants that the bank has effective ways for preventing market confusion.

“Many investors are closely watching what Kuroda will say at a press conference after the policy meeting next week,” the trader said. “His remarks could determine the fate of the yen.”