Tinker, Tailor, Soldier On: Takeaways From the BOJ's Policy Review

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Haruhiko Kuroda really, really wants you to believe he isn't remotely finished juicing Japan's economy.

The Bank of Japan wrapped up a three-month review of its policy Friday with some tweaks to its approach. It will allow the yield on 10-year government bonds to move 25 basis points on either size of the bank’s zero target, a slightly wider range than investors assumed previously. (In a testy exchange with reporters after the announcement, Kuroda emphasized that the band had not been widened; rather, the policy was merely clarified.) The benchmark interest rate will remain at minus 0.1%, though officials won’t hesitate to cut deeper into negative territory if necessary. Officials emphasized they expect easing to be prolonged. They also ditched the bank’s 6 trillion yen ($55 billion) guide for annual purchases of exchange-traded funds, while keeping an upper limit of 12 trillion yen so the BOJ can step in if sentiment sours. 

This is hardly radical stuff from the BOJ, which pioneered near-zero rates and quantitative easing a few decades ago. Its struggles to revamp speak to a predicament faced by central banks around the world: How do you allow more flexibility to reflect changes in the local and global economy without appearing like you are capitulating? Japan's challenges also suggest that once you pursue unconventional policy, setting up an orderly exit can be tricky. It can be equally hard to convince people that you still have ammunition. The BOJ is already the country's biggest holder of stocks and bonds. 

If the results of this review look modest, it reflects in part a huge change in the economic landscape since late last year. When the BOJ announced its plans on Dec. 18, the outlook was pretty grim. Japan was grappling with a new wave of coronavirus cases, the economy was slowing after a third-quarter rebound and the bank's 2% inflation target was slipping further from sight. Donald Trump was still claiming fraud in the American presidential election, Senate control wasn't clear and prospects for significant U.S. fiscal spending weren't promising.

Much of that has turned around, leaving the BOJ in a bit of a jam. The passage of $1.9 trillion in stimulus and a vaccination drive have reshaped the environment. Global growth forecasts are being raised and investors are worried that a rekindling of inflation will push officials to pull back on easy money. The yield on the 10-year U.S. Treasury was around 0.93% on Dec. 18; it's now about 1.71%. 

For Kuroda, the review began as an exercise in convincing people that the BOJ can ease more. Yet it became as much about reassuring markets that flexibility doesn't mean openness to tightening. While a wider band around zero can mean going deeper into negative territory, it also means the central bank is, in principle, comfortable with higher yields. Judging from the global market zeitgeist, investors are bound to test this. Yet Japan’s inflation target remains elusive, with figures Friday showing consumer prices fell for a seventh month. While the world outlook has improved, the domestic economy is only just reawakening. Prime Minister Yoshihide Suga said this week the Tokyo region’s state of emergency will end Sunday

You can't announce a review and produce nothing. That might explain Kuroda's recent efforts in parliament to quash speculation about a band widening, only to include a modest nudge in the policy review. The governor told lawmakers March 5 that he saw no need for such a step, precipitating a market slide. Remember, too, Kuroda has a flair for surprise. Shortly before Japan introduced negative rates in 2016, he dismissed the need for them.  

Setting low expectations can have tactical advantages. But at the end of the day, investors are left with the bare facts: Japan has no plans to exit ultra-easy money, and can ease again if it wishes. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2021 Bloomberg L.P.

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