BoJ chief takes fight to the stock market

SINGAPORE: When Haruhiko Kuroda began his monetary adventure in April 2013, it seemed he was only following the eighth rule of Fight Club: “If this is your first night, you have to fight.”

Three years later, markets are wondering if the Bank of Japan governor has moved on to the film’s fifth rule: “One fight at a time, fellas.”

Kuroda would have been perfectly aware that not bulking up the BoJ’s bond-buying and negative interest rate programmes would crush the yen bears, and a stronger home currency would have damaging consequences for Japan Inc. But given how hard it would have been to please the “helicopter money” dreamers, he must have concluded that the only fight he could hope to win for now was in the stock market.

At least that’s the message he gave on Friday by announcing a neardoubling of the central bank’s exchange-traded fund buying plan to ¥6 trillion annually. It didn’t take long for Japanese stocks to shrug off the disappointment of Kuroda’s standstill on the exchange rate. The benchmark Topix index rose 1.2%.

Kuroda’s new goal could act as a prop for stock prices. Since early 2013, Japanese ETFs that primarily invest in the country have seen ¥8 trillion of inflows. The BoJ’s hoarding of ETFs has been at least partly responsible for more fund units getting created and bought.

A ¥3-trillion increase in ETF holdings would mean more money going into stocks, which might help Kuroda cheat a little on the third rule of Fight Club: “Someone yells stop, goes limp, taps out, the fight is over.”

The debt market went limp when Kuroda started scooping up government bonds. The currency market yelled “stop” when negative interest rates caused the yen to strengthen. The only saving grace is that the equity market hasn’t tapped out.

In US dollar terms, the Topix is down just 3% from a year earlier, but it’s still up 38% from four years ago. For Japanese investors, the home market has been more rewarding in yen terms than faster-growing emerging markets such as China, India and the Philippines.

But fluffier equity prices or the carrot of cheaper credit that Kuroda is dangling before Japanese companies won’t be enough to boost investment. For that, the market needs to be able to form reasonable opinions about whether the yen, which surged past 104 against the dollar on Friday, might soar to 80 two years from now, or slump to 120.

At present, nobody quite knows where Japan is going with its monetary policy. To allay those concerns, Kuroda has promised a “comprehensive assessment” by the next policy meeting, by which time he’ll also know exactly how much new spending Prime Minister Shinzo Abe plans as part of his recently announced $265-billion fiscal stimulus.

If Kuroda disappoints yen bears in September, his fight against deflation might well and truly be over.