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BOJ's Kuroda under pressure to return to the fight


BANK of Japan governor Haruhiko Kuroda, who made his mark pursuing aggressive monetary stimulus policies, is under fresh pressure by financial markets to return to the fight.

Government bond yields are falling through the floor of the central bank's target range, the yen is hovering at the limit of companies' comfort zones and inflation is weakening again. Add the fact that other central banks are stepping up to support their economies and Mr Kuroda has no shortage of reasons to do likewise. Among the options are lowering the negative short-term interest rate, increasing asset purchases or widening the trading range around its long-term yield target.

"The BOJ has probably already made up its mind that it has to ramp up its easing," said Masaaki Kanno, chief economist at Sony Financial Holdings and a former BOJ official.

Market voices on:

"The BOJ can't take the risk of watching the yen strengthen without doing anything when the Fed and ECB are going to act."

Economists including Takeshi Yamaguchi at Morgan Stanley see a lowering of the short-term negative rate among the most likely moves by the BOJ, should it take action. Merely widening the trading range around the 10-year yield could encourage market players to take on the new floor and force yields even lower, former BOJ board member Sayuri Shirai said, also pointing to a negative rate cut should the yen strengthen further.

Japan's central bank has been reluctant to take further action out of growing concern that its yield curve-control programme is squeezing profits at commercial banks and distorting markets. Feeble inflation by itself hasn't been enough of a factor for the central bank to add extra ammunition, even though the BOJ sets price growth as the main target of its easing programme.

But now the limits of its YCC (yield curve control) programme are becoming more apparent as the BOJ faces increasing difficulty in stopping the downward movement in 10-year government debt yields. While Mr Kuroda said he the trading range around the yield target shouldn't be taken too literally, the continued falls are straining the limits of interpretation.

The BOJ has scaled back its bond purchases further in recent days, trimming its buying plans for September and carrying out a smaller bond operation on Monday. Still, the yield on the benchmark 10-year JGB (Japanese government bond) is -0.265 per cent, seen well below the loose trading range around zero permitted by the central bank.

BOJ moves to cut its bond buying at a faster pace run the risk of being interpreted by market participants as a tapering of stimulus. That can be a trigger for more yen strength when the murky global outlook is already driving safe-asset demand into Japan's currency. The yen touched 104.46 per US dollar last week, its lowest level since November 2016. That's above the 109.35 expected by Japan's big manufacturers for this fiscal year, according to central bank's quarterly Tankan survey.

While the economy is far from crisis mode despite the murky global outlook, a looming sales tax could remove the prop of domestic consumption that has helped keep the economy expanding.

Expected rate cuts by the Fed and the ECB this month could help push up the yen, adding to the pressure cooker status of the BOJ's predicament. BLOOMBERG