BOJ Expands ETF Purchases While Maintaining Bond-Buying Target

(Bloomberg) -- The Bank of Japan expanded its purchases of exchange-traded funds and doubled the size of a U.S. dollar lending program, while refraining from boosting the pace of government-bond purchases that have formed the main part of its monetary stimulus.

Governor Haruhiko Kuroda led his board in voting to expand an ETF program to 6 trillion yen a year, the BOJ said in a statement in Tokyo Friday. In an unexpected development, Kuroda has ordered an assessment of the effectiveness of BOJ policy, to be undertaken at the next meeting, which is scheduled for September.

The central bank kept its annual target for expanding the monetary base at 80 trillion yen ($779 billion), done mainly through an equivalent increase in government bond holdings. It also left untouched the minus 0.1 percent rate for a portion of commercial banks’ reserves. A dollar-lending program was expanded to $24 billion.

By taking some action, Kuroda, 71, offers support for Prime Minister Shinzo Abe, who two days ago unveiled a 28 trillion yen fiscal stimulus package that will now bear the main burden for stoking expectations for growth and inflation. The BOJ had come under increasing pressure from the government to make a move that dovetailed with its own package, making it tough for Kuroda and his team to leave policy entirely unchanged today.

The yen climbed immediately after the announcement. Most economists had predicted more from the BOJ, given diminishing inflation expectations and weak growth. Almost two thirds had predicted a rate cut, more than two thirds had seen an acceleration in ETF buying, and just over half predicted a stepping-up in the increase of the monetary-base.

The limited move underscores a perception that the BOJ is running into operational challenges as the Kuroda era of massive stimulus wears on. The former Finance Ministry currency-policy chief fired his first bazooka weeks after taking the BOJ’s helm in March 2013, and surprised investors by expanding the program in October 2014. More recently, the introduction of a negative-rate policy this January came as a shock to observers, just days after he had publicly rejected the idea.

“The BOJ is facing difficulties to do additional easing,” Izuru Kato, head of Totan Research Co. in Tokyo, said before the decision, pointing to difficulties in all three of the channels used so far: bond buying, risk-asset purchases and a negative policy rate. “The BOJ has to change its course to stimulate the Japanese economy.”

The focus now shifts to Abe’s fiscal package, the outlines of which are set to be reviewed by the cabinet next week, with analysts anticipating passage in parliament in October. Much of the plan’s 28 trillion yen headline number is likely to be loans that can be spread over years. There’s about 7 trillion yen of new spending included, according to a person familiar with the matter, who didn’t specify the time frame for the outlays.

Historically, fiscal stimulus efforts on their own have failed to reverse the deflation that took hold in the 1990s, and many economists have instead advocated that the Abe administration focus on structural reforms. Little new has developed in recent months on the reform front, this so-called third arrow of Abenomics, with the focus dedicated to the fiscal discussions.

Still, the International Monetary Fund said earlier this month that “Japan’s growth in 2017 could be higher if, as expected, a supplementary budget for fiscal year 2016 is passed, providing more fiscal support.”

The BOJ’s announcement came hours after government reports showed that the economy remained weak in June. Core consumer prices dropped for a fourth consecutive month while household spending slumped. Industrial production was a bright spot, rising more than expectations. The data also showed continuing tightness in a labor market influenced by the country’s shrinking population.

BOJ board members at this meeting also updated forecasts for inflation and growth, after repeatedly postponing the time frame for achieving their 2 percent target for consumer price gains. The BOJ’s calculation of prices excluding fresh food and energy has slumped to less than half the goal in recent months.

With its easing to date, the BOJ now holds more than one third of Japanese government bonds outstanding, contributing to a collapse in yields -- with JGB maturities out to 15 years recently staying below 0 percent. That has flattened the so-called yield curve, eroding the spread for banks between their short-term funding costs and long-term lending rates.

The BOJ’s vacuuming up of government debt also has led to a slump in liquidity, making it more difficult to step up the current pace of JGB buying.

“A technical limit of large-scale JGB purchases is in sight,” Kiichi Murashima and Katsuhiko Aiba, Japan economists at Citigroup Inc., wrote in a note before the BOJ’s announcement. They anticipated the central bank over time will depend more on the negative interest rate policy.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net, Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net. To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Jodi Schneider