Bank of Japan struggles with endless stimulus

The Bank of Japan will unveil the results of its largest policy review since 2016 this week as the central bank grapples with the fallout from a monetary stimulus that has lasted longer than anyone imagined.

BoJ officials insist the article does not aim to ease or tighten monetary policy – a decision made by its policy board eight times a year – with Governor Haruhiko Kuroda promising in advance to continue to set 10-year bond yields at “around zero “.

Instead, the goal is to make the central bank more ‘nimble’. Like a boxer who missed an early knockout, the BoJ finds itself in a bitter struggle to hit 2% inflation. The point of the exam is to take a break, regain a sense of control, and develop a plan for ultimate victory.

When it unveils the results on Friday, the BoJ intends to maintain the global stimulus launched by Kuroda in 2013, during which its balance sheet grew to 135% of gross domestic product, and the central bank took ownership of around 7% of the Japanese stock market.

But the review could pave the way for more variation in BoJ buying, buying fewer bonds and stocks when markets are calm, while intervening aggressively in times of turbulence. This would give more space for prices to fluctuate in order to respond to criticism that brutal intervention has crushed the functioning of the market.

“While large fluctuations in interest rates can have undesirable consequences, fluctuations within a certain range could have positive effects on the functioning of JGB markets without losing the effects of monetary easing,” Masayoshi amamiya, the vice-governor often considered the political brain of the BoJ, said in a speech last week.

The possibility of Haruhiko Kuroda pulling a rabbit out of the hat is slim © Bloomberg

In addition to an economic analysis, examining why it has been so difficult to raise inflation in Japan, the review is expected to examine three main policy points: the cap on 10-year bond yields at “around zero” ; the prospect of deeper negative interest rates below the current -0.1 percent; and the BoJ’s purchase of exchange-traded funds.

Initially, the BoJ encouraged speculation that it would widen the range in which 10-year bonds are allowed to trade, leaving yields to rise 30 basis points above zero. However, in the past 10 days, the central bank has dashed that expectation as Japan struggles to launch its Covid-19 vaccination program and US markets go through a period of volatility.

“I have a feeling that Amamiya and the BoJ planning team are still in favor of expanding the group,” said Takeshi Yamaguchi, chief economist at Morgan Stanley in Tokyo.

“But there is no solid economic reason to do so. I think that would be a tightening of the policy and I don’t think Governor Kuroda and the accommodating board members will agree.

Instead, the BoJ will likely provide less detailed timetables for its bond purchases, and it may revisit a band widening this year.

Another goal will be to persuade markets that the BoJ could cut interest rates even deeper into negative territory, giving it the ammunition to act in the event of a downturn. In reality, however, the barrier to doing so is high because it fears a backlash from the public, politicians and the financial sector.

Equity purchases may lead to the biggest policy shift, mirroring the uniqueness of the BoJ’s large-scale buying as the Tokyo market hits its highest level in 30 years.

Currently, the central bank is committed to buying an average of 6 billion yen ($ 55 billion) per year in stocks, with an upper limit of 12 billion yen ($ 110 billion). The BoJ may drop the ¥ 6tn number – a significant move as having only one upper limit is consistent with not buying any shares at all.

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“The BoJ will be more flexible: it will buy fewer exchange-traded funds when prices are high,” Yamaguchi said. He added that he would prefer the BoJ to remove the upper limit of 12 tons of yen because removing the average of 6 tons of yen “gives too much leeway to the BoJ’s operations department.”

There is still the possibility that the BoJ will find a rabbit in its hat. Kuroda is well known for enjoying surprising markets with easing measures. Eight years after the BoJ’s move to large-scale stimulus, however, there are few monetary policy options to explore.

Masamichi Adachi, chief economist at UBS in Tokyo, said the BoJ risked getting bogged down in policy details. “I don’t think an ordinary person outside of the JGB market understands what a widening of the yield range means,” he said. “It’s too technical.”

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