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Kuroda's move: Easing to continue or stealth taper?

BOJ watchers debate the central bank governor's latest policy tweaks

Hong Kong

BANK of Japan (BOJ) governor Haruhiko Kuroda's policy tweaks have either strengthened the long-running stimulus or mark a stealth "baby step" towards normalising policy. Or both?

The BOJ on Tuesday made adjustments to two pillars of its policy that could be interpreted as steps towards normalisation: It said it would let the 10-year yield rise just a bit higher, to 0.2 per cent from 0.1 per cent, and it cut in half the amount of bank reserves that would face its negative rate of minus 0.1 per cent.

On the other hand, it also introduced "forward guidance", pledging to keep short and long-term rates at extremely low levels for an "extended period of time", though that's not dramatically different from its long-running pledge, reiterated in June, to continue its stimulus programme "as long as it is necessary".

For Masamichi Adachi, senior economist at JPMorgan Chase & Co and a former BOJ official, the forward guidance tells the story: The BOJ strengthened its commitment to easing.

"It's irrational to argue that they're tightening when the inflation outlook is falling rather than rising," Mr Adachi said. "As long as you believe that the BOJ is still trying to achieve 2 per cent inflation as soon as possible, the logical thinking is that this move is easing, not tightening."

Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group, agrees. "When you look at rates policy alone, I think they are adding to easing somewhat because they keep low rates longer than people had expected."

Japan's benchmark yield rose while futures extended losses on Wednesday.

Former BOJ board member Takahide Kiuchi, now an economist at Nomura Research Institute, labelled the new, wider range for 10-year yields a "stealth rate hike".

The measures announced on Tuesday are "de facto normalisation with an emphasis on the side effects of monetary easing", Mr Kiuchi, a consistent hawkish dissenter during Mr Kuroda's term, wrote in a note.

Hiroaki Muto, chief economist at Tokai Tokyo Research Center, said he saw a clear step away from the central bank's negative rate policy.

"They cut the amount of reserves that the negative interest rate is applied to, so really, I think they want to stop using negative interest rates," said Mr Muto. "They did it this way to avoid provoking markets. But if they thought negative rates were effective they wouldn't do something like this. So I think they're starting to think they can stop the negative rates."

Andrew Jackson, head of Japanese equities at Soochow CSSD Capital Markets in Singapore, said "it's very hard to quantify but the fact that they are expanding the acceptable band for yields shows it is akin to something like a stealth taper".

Tuesday's market moves are likely to provide only a temporary reprieve for the BOJ, according to Jun Kato, chief market analyst at Shinkin Asset Management Co in Tokyo.

"The market is more likely to test an upside to bond yields sooner or later given the BOJ allows wider deviations in the 10-year yield, and the yen will probably strengthen during the process," Mr Kato said. The policy tweak "points to a distant-future exit and thus is a catalyst for yen strength in the medium to long term". BLOOMBERG

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