Pedestrians holding umbrellas while walking past the Bank of Japan (BOJ) headquarters are reflected in a puddle in Tokyo, Japan. (Photographer: Tomohiro Ohsumi/Bloomberg)

BOJ's Kuroda Starts New Term With Fresh Commitment to Easing

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(Bloomberg) -- Governor Haruhiko Kuroda began his new term at the Bank of Japan much as he did the first one -- emphasizing his commitment to hitting 2 percent inflation.

The BOJ left its policy settings intact, vowing to push ahead with stimulus even as other major central banks move further toward policy normalization, though at a moderating pace amid signs of slowing economic growth. Still there was a twist -- not uncommon in Kuroda’s tenure -- as the BOJ’s policy statement omitted mention of the projected time frame for hitting his longstanding 2 percent target.

The tweak left BOJ watchers wondering if that signaled a shift in policy, leading to a rush of questions at Kuroda’s news conference. The governor, 73, was quick to dispel any notion he was wavering on stimulus, saying the change was about sending a message to markets: the timing was itself just a forecast and not a driver of policy decisions.

"As I’ve said before, it’s a simple matter of avoiding expressions that could invite misunderstanding in parts of the market," Kuroda said. "On why now -- this was something that would happen at some point in time, and that just happened to be now. There is no deep meaning to it."

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The BOJ also left its inflation forecasts largely unchanged. It still sees core inflation, which excludes fresh food prices, reaching 1.8 percent in fiscal 2019, though seven of nine board members said risks to that forecast were weighted to the downside.

‘Losing Confidence’

Kuroda stressed that there was no change in the BOJ’s commitment to overshooting 2 percent inflation, with a "good chance" the price target will be met around fiscal 2019 after all. The goal has not become one for the medium or longer term, he said.

Private economists, who find the BOJ’s inflation projections overly optimistic, seized on the removal of language from its statement as a concession to reality. The time frame had been pushed back six times previously.

"The truth is that the BOJ is losing confidence in hitting the target," said Kazuo Momma, a former BOJ executive director in charge of policy planning. "They were feeling it’s getting harder and harder to meet the target around fiscal 2019 and they couldn’t keep the forecast any longer because of the huge uncertainty. Almost all of them see risks are on downside."

The board also disliked the time frame being used as an argument for additional stimulus, and decided that its own policy freedom was more important than any effects of the timing on inflation expectations, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute and a former BOJ official.

"They used to say the target has a lot of impact in terms of expectations, but they’re no longer adhering to that line," Kumano said. "I think they want to say that they have both the yield-curve control and the overshoot commitment, so it’s ok even if they didn’t clarify the timing for reaching the target."

What our economist says

  • "The absence of a reference to a time frame for achieving 2% inflation in the latest outlook report signals a shift to a more sustainable -- and realistic -- approach to reflating the economy," Bloomberg Economics’ Yuki Masujima wrote, while noting that only one board member sees inflation hitting 2 percent -- and that’s in fiscal 2020. 

Economists also pointed to the arrival of Masazumi Wakatabe, the dovish newly appointed deputy governor, as another possible reason for removing the time reference. Leaving it in place could have led Wakatabe to push for more stimulus, said Masaaki Kanno, chief economist at Sony Financial Holdings and a former BOJ official.

"He wants to support Kuroda as a deputy but at the same time, doing nothing when another delay took place would completely contradict what he said before joining the board," Kanno said. "So in a way, another delay was going to provide an allegiance test for Wakatabe and the BOJ saved him by ditching the forecast altogether."

This week’s policy meeting was Wakatabe’s first. He voted with the board and didn’t make any proposals.

Even after five years of pumping massive amounts of money into the economy, the BOJ’s key inflation gauge stood at 0.9 percent in March. Eighty-five percent of economists surveyed said they don’t think Kuroda can meet the price goal before his term ends in 2023.

©2018 Bloomberg L.P.

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