Pressure mounts on Bank of Japan to reverse deflation more quickly
BANK of Japan (BOJ) governor Haruhiko Kuroda gave himself two years to do “whatever it takes” to end deflation and revive the world’s third-largest economy. He may have less than half that time to produce results.
Mr Kuroda needs price rises in six to 12 months or the market may lose confidence in his ability to reach a 2% inflation target by 2015, say Goldman Sachs Group and JPMorgan Chase. The BOJ will boost monthly bond purchases by about 50% to ¥5.2- trillion ($55.7bn) at a two-day meeting, which started yesterday, according to the median forecast in a survey of economists.
Pressure for results is growing amid doubts by economists and former BOJ officials over whether Mr Kuroda can meet his deadline. At stake is the credibility of Prime Minister Shinzo Abe’s economic programme — dubbed Abenomics — after expectations for more easing sent the yen more than 16% lower against the dollar in the past six months and stocks to a four and a halfyear high.
“Mr Kuroda doesn’t have two years,” said Masamichi Adachi, senior economist at JPMorgan in Tokyo and a former BOJ official. “He has to show that inflation is approaching 1% in at least a year, and if he can’t, then the power of Abenomics will be in doubt.”
Japan’s core prices have fallen in 19 of 26 months to February, and analysts surveyed by Bloomberg see a rise of 0.5% in one year.
Prices excluding fresh food have not risen by 2% for any year since 1997, when a sales tax was increased. The yen was 0.1% higher at ¥93.37/$ in Tokyo yesterday, after rising past ¥93/$ for the first time in a month on Tuesday. The Nikkei 225 stock average snapped a two-day decline, closing up 3%.
Mr Kuroda, who said on Tuesday bold action was necessary to meet expectations, has indicated that expanded purchases of government bonds will be the main tool for easing. Yields on 10- and 20-year bonds fell to near decade lows on March 26.
The bank buys debt with maturities of as long as three years, as well as exchange-traded funds and other securities in an asset-purchase programme for monetary easing. Outright monthly purchases of government bonds were an average ¥3.4-trillion in the first three months of this year, according to data compiled by Bloomberg.
Mr Kuroda has said the bank will consider combining monthly purchases and an asset-purchase fund, as well as buying more debt with longer maturities. He has also suggested the bank will bring forward open-ended purchases planned for next year. Setting a target for the size of the balance sheet is another policy shift being considered, people familiar with the central bank’s discussions said last week.
Japanese legislators will vote on Mr Kuroda’s selection as central bank governor for a second time tomorrow.
He was confirmed by both houses of parliament last month to serve to Monday, April 8 in the final weeks of predecessor Masaaki Shirakawa’s term, and a second approval is needed for a full five-year period.
Atsushi Mizuno, a former BOJ board member, said last month that more bond purchases risked a market bubble. Kazumasa Iwata, a former BOJ deputy governor, said last month that Mr Kuroda’s two-year deadline was impossible.
Even Mr Abe said yesterday that the BOJ should not pursue a 2% inflation target “at all costs” and may fail to achieve it should global conditions change. If Mr Kuroda cannot reach the inflation target and cannot explain this failure, both he and deputy governor Kikuo Iwata should resign, ruling party legislator Kozo Yamamoto said yesterday in Tokyo.
Mr Abe said on Tuesday in parliament that Mr Yamamoto is an influence on his thinking on monetary policy.
Mr Kuroda’s window for success may narrow if stimulus is delayed until the BOJ’s second scheduled policy meeting this month, a possibility seen by Goldman Sachs. “They are likely to introduce the reforms in stages because of serious time constraints and the difficulty to debate the issues fully with board members,” Naohiko Baba, Goldman Sachs’s chief Japan economist in Tokyo, wrote on March 29.
All 19 economists surveyed see the central bank taking action at the meeting this week. Eleven gave numerical forecasts for expanded monthly bond purchases, while four did not give an amount. Two expect the BOJ to delay some easing measures until April 26. Two did not say whether the BOJ would expand monthly bond purchases.
“The market is impatient but Mr Kuroda should be able to maintain expectations,” said Masayuki Kichikawa, chief Japan economist at Bank of America Corporation in Tokyo. “As long as Mr Kuroda shows he is willing to add stimulus, investors won’t be significantly disappointed.”
The yen’s fall is already working on sentiment. Toyota Motor agreed last month to pay its employees in Japan the biggest bonus in five years and Kubota, a tractor maker, predicts record sales.
Household sentiment on the economic outlook in a year’s time rose to a record high last quarter, BOJ data showed this week, while the percentage saying they expect prices to rise in one year was the highest since September 2008. Still, confidence among big manufacturers in a separate BOJ survey improved by less than economists estimated, bolstering the case for Mr Kuroda to expand stimulus this week.
Elsewhere in the Asia-Pacific region, Thailand was expected to leave its benchmark interest rate unchanged at 2.75% at a meeting yesterday, according to 20 out of 21 economists.
Australia posted a smaller than expected trade deficit for February.
Data in Europe may show that consumer prices in the euro area rose 1.6% last month from a year earlier, according to the median estimate of 44 economists in a Bloomberg survey, down from 1.8% in February. In the US, a private report may show companies added 200,000 workers last month after a 198,000 gain in February.
The yen’s decline is already swelling the import bill in Japan as nuclear-plant shutdowns force increased inbound shipments of fossil fuels. Exports fell 2.9% from a year earlier in February, while imports surged 11.9%.
Economy Minister Akira Amari said this week that economic growth should be able to absorb some of a weaker yen’s undesirable effects. Bloomberg