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Kuroda remarks open possibilities for shift in BOJ stimulus

Monday, January 26, 2015 - 07:20
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Governor Haruhiko Kuroda says the Bank of Japan may need to get creative in any further monetary stimulus. Among the options economists highlight: regional-government bonds, a type of security that could aid public support.

[DAVOS] Governor Haruhiko Kuroda says the Bank of Japan may need to get creative in any further monetary stimulus. Among the options economists highlight: regional-government bonds, a type of security that could aid public support.

Kuroda, speaking in an interview with Bloomberg Television Friday in Davos, Switzerland, said "there are many options and I don't think it's constructive to say this or that could be done." He reiterated that if inflation expectations are "seriously" affected by disinflation, policy can be changed.

The bulk of the central bank's record asset buying is currently concentrated in debt issued by the national government, yields on which have been pulled down toward zero, even on 10-year notes. BOJ officials had different views on how much capacity there was to expand the purchases, people familiar with the discussions said last month.

"This could be a reflection of his thoughts that bond purchases are coming close to their limit because it's buying almost all of the newly issued bonds each month," Takahiro Sekido, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. who used to work at the BOJ, said after Kuroda's remarks. "Options he could take include derivatives and regional bonds. By buying regional bonds, the BOJ could say it's supporting the government's efforts to revitalize regional economies." Prime Minister Shinzo Abe's ruling Liberal Democratic Party, facing local elections in April, has sought to spread the benefits of the Abenomics program to regions that have borne the brunt of Japan's population decline and aging. The initiatives so far have brought the biggest positive impact to exporters, whose profits have climbed with a weakening yen, and to investors in stocks, which have soared.

Lawmakers last year began questioning the wisdom of driving down the yen and making the cost of living more expensive for households, amid continued stagnation in wages.

Spreading the BOJ's asset purchases to securities issued by prefectures and municipalities would raise the potential for added backing for the central bank's efforts to spur inflation toward 2 per cent.

The amount of regional bonds outstanding may reach 200 trillion yen (US$1.7 trillion) at the end March, according to a finance ministry report released in October.

The BOJ could buy shares from banks directly, or equity in commodity funds and real estate funds, according to Izumi Devalier, an HSBC Holdings Plc economist in Hong Kong.

Fed, ECB Overseas, the US Federal Reserve bought mortgage securities as a significant part of its asset purchases. The European Central Bank, which unveiled its quantitative easing programme on Thursday, will buy government bonds, securities issued by public agencies and asset-backed securities, according to a euro-area official last week.

The ECB action would be "beneficial to the world economy including the Japanese economy," Kuroda said in the interview. "We very much welcome this action." A majority of economists surveyed by Bloomberg News expect the BOJ will step up easing by October. Much of the difference in the outlook between the central bank and private economists, along with the International Monetary Fund, may hinge on the impact of oil on the economy. Kuroda in the interview repeated his confidence that over the long run, the slump in oil will strengthen economic growth and push up consumer prices.

"In the short run, oil price declines tend to reduce inflation all over the world," Kuroda said. In the medium to long run, lower oil prices could raise the "real growth rate, and that would eventually raise the inflation rate gradually." Oil Impact If oil falls by 50 per cent from a peak in June last year, it would boost nominal gross domestic product by 1.2 percentage points, or 5.6 trillion yen, according to a government estimate, Kyodo News reported.

Japan imports almost all of the oil it consumes and the price has declined about 60 per cent since June.

"Concerns among households and companies will be alleviated," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. "Together with the fading impact of April's sales tax hike, spending by consumers and business will pick up and Japan's economy will return to a gradual recovery trend."

Capital Economics sees limited demand boost from cheaper oil prices. "Much of the windfall will be saved and the boost to demand over the course of the year will be much smaller," economists Marcel Thieliant and Mark Williams wrote in a note on Jan 23. "Growth will be much weaker than most expect." The BOJ projects 2.1 per cent growth in the year starting in April while economists in a survey by Bloomberg predict a 1.7 per cent gain for the same period. The IMF last week forecast 0.6 per cent growth for calendar 2015.

"The BOJ got time after significantly revising down their inflation forecasts," said Koya Miyamae, an economist at SMBC Nikko Securities Inc. "Kuroda is ready to be patient with inflation while pressure will mount for more action as the price target will remain distant."

BLOOMBERG