Taming of Shock-and-Awe Kuroda Shows Central Bank Caution (2)

Jun 16, 2017 1:35 pm ET

(Bloomberg) -- Haruhiko Kuroda epitomized the new activism of central bankers around the world in his early days as governor, declaring he’d have inflation where it should be before too long as the Bank of Japan doubled down on massive bond buying in 2013.

Now, as the clock ticks down on his five-year term and the BOJ’s balance sheet continues to swell, Kuroda’s not even half way to his price target.

Read More: BOJ Maintains Huge Stimulus as Pressure Rises to Talk About Exit

While peers like Janet Yellen at the Federal Reserve have moved into the exit lane, they’re doing so cautiously. With the global outlook finally turning up, they’re at pains to avoid sending ripples through placid financial markets.

"Kuroda is treading carefully," said Izumi Devalier, head of Japan economics at Bank of America Merrill Lynch. "The last thing the BOJ wants to do is to send an unintentionally hawkish message and risk the yen appreciating."

It’s not even clear what normal monetary policy in Japan would eventually look like given the central bank of the world’s third-largest economy has been doing some kind of unconventional policy for so long. While other central banks are looking to end their use of unconventional tools, there’s no sign that the BOJ can drop these policies anytime soon.

"Achieving and maintaining stable prices and avoiding a return to deflation are far more important than the problems of the prolonged period of easing," Kuroda said at a press conference on Friday after keeping policy unchanged.

He said it was inappropriate at this point to show any specific exit simulations that might be considered by the BOJ, citing the potential for causing confusion.

Yet he did offer this broad comment: "Generally, when you discuss the normalization process of unconventional monetary policy or quantitative monetary easing, it’s normal that the operation of the short-term rate and how to adjust the balance sheet would be a focus.”

Economic Growth

It was the sixth meeting in a row in which the BOJ made no change to its policy settings as the nation’s longest period of economic expansion in a decade provides some support. The BOJ will continue to manage the yield curve through a negative interest rate and buying trillions of yen worth of bonds.

The BOJ maintained its rough guideline to increase its holdings of Japanese government bonds by 80 trillion yen ($719 billion) a year. Kuroda, who in May acknowledged the figure had dropped to about 60 trillion yen, said on Friday it could change a lot each month.

He also said that it was theoretically possible for purchases of exchange-traded funds to drop before the inflation target is reached.

The overall assessment of the economy was unchanged, with the BOJ characterizing it as "turning toward a moderate expansion."

The improving economy and moves by other central banks to normalize policy are fueling calls for Kuroda to at least map out some details of how the BOJ may eventually exit stimulus. The problem is, with only a nascent recovery in wages, the last thing the BOJ wants to do is trigger a rally in the yen that would hurt company profits, pay and investment.

The yen gyrated during Kuroda’s press conference. It was 0.4 percent weaker versus the dollar at 5:46 p.m.

The danger for the BOJ is that any signal to eventually tighten policy, even if they make it clear that it’s not imminent, would only put upward pressure on bond yields and make it even harder to control the yield curve.

‘False Starts’

"There have been too many false starts for central banks who thought they could exit from their ultra-accommodative stance but subsequently had to u-turn or delay," said David Mann, chief Asia economist at Standard Chartered Plc.

In some ways, the BOJ finds itself in a familiar place to where it was shortly after the global financial crisis, when the Fed’s decision to unleash quantitative easing intensified calls for Japan too to top up its own stimulus. These days the Fed’s gradual move for the exit door is adding pressure on the BOJ to also signal where it’s headed.

“The Fed is communicating very carefully on its exit and keeping markets stable so far,” said Kyohei Morita, chief Japan economist at Credit Agricole Securities in Tokyo. “The BOJ is totally at a different stage with almost no inflation, but the Fed’s move is helping trigger calls for more public discussions in Japan.”

(Adds further comments from Kuroda at press conference.)

--With assistance from Henry Hoenig James Mayger Yoshiaki Nohara Keiko Ujikane and Yue Qiu

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