Bank of Japan Keeps Policy Steady After Abe’s Fiscal Package
Heading into 2020, extra easing hasn’t been entirely taken off the table for global central bankers including Kuroda.
(Bloomberg) -- Bank of Japan chief Haruhiko Kuroda added his voice to the guarded optimism among major central bankers over the trajectory of global growth.
Progress in U.S.-China trade talks, a stronger U.K. mandate for Brexit and an apparent bottoming of the manufacturing slump are easing concerns over a global slowdown that had triggered a wave of interest rate cuts across the world earlier in the year.
Jerome Powell has put the Federal Reserve on pause, Christine Lagarde has signaled the worst is likely over for the eurozone and now Kuroda has talked of an improvement in the risks surrounding growth. In the case of Kuroda, he has managed to navigate through a precarious year without having to delve deeper into his depleted stock of ammunition.
Heading into 2020, extra easing hasn’t been entirely taken off the table for global central bankers including Kuroda, but the possibility of a long holding pattern followed by a firming of policy is now looking a lot more likely than it did at the end of the summer.
“Overseas risks have improved somewhat from a while ago and it’s true that we have seen relatively bright signs,” Kuroda said Thursday at a press conference a few hours after the BOJ kept its interest rates and policy guidance unchanged. “Still, the risks remain very high and we need to watch them closely.”
In the case of Kuroda he also has a $120 billion government stimulus package to reassure his concerns. The extra spending by Prime Minister Shinzo Abe’s administration aims to get the world’s third-largest economy back on track after a sales tax hike and a super typhoon hit consumption and production. The governor said the package would have a positive impact on the economy, by supporting domestic demand and prices.
“As we continue our massive monetary easing with yield curve control, I hope the synergy effects of a policy mix will be big,” Kuroda said. The comment suggests that with the government taking more of a share of supporting the economy, the central bank will be looking to back off from taking further action barring a buckling of markets or a renewed deterioration in growth.
What Bloomberg’s Economist Says
“The economy is slowing and inflation is far from target, but with the government starting to rev up fiscal stimulus, the central bank has more leeway to be patient.”
--Yuki Masujima, economist
Click here to read more.
BOJ officials see a sizable impact from Abe’s fiscal spending, which is expected to boost the economy by 0.35 percentage points, according to economists surveyed. The government Wednesday estimated Japan’s growth will reach 1.4% in the year starting in April, increasing the likelihood that the BOJ will upgrade its own projection of 0.7% in a quarterly report next month.
“The BOJ is indicating nascent optimism for the outlook of the economy,” said Tetsufumi Yamakawa, head of Japan research at Barclays PLC, adding that he saw no reason to expect further easing after today’s decision. Still, he said that from his own perspective it seemed too early to lift the veil of gloom over the direction of global growth given continued uncertainties that remain around trade, Brexit and Japan’s economy.
“It’s interesting to see how dramatically the BOJ changed its tone on the economy over the past several months. One of the biggest reasons is of course the yen’s depreciation and rising stocks,” said Yamakawa, a former BOJ official.
Market Watchers Weigh in on BOJ’s ETF Lending Program
In another reminder of the mounting side effects of the BOJ’s massive easing program, the bank released details of a lending program for exchange-traded funds. As part of its large-scale asset buying, the central bank has become by far the largest owner of ETFs in Japan. The lending program should help improve liquidity in that market, though doubts remain about the need for the purchases.
The central bank owns more than 70% of Japan’s ETF market, raising concerns about the BOJ becoming a major factor affecting stock prices. This, and other side effects of its easing such as warping bond prices and squeezing the profitability of commercial banks are keeping the hurdle high for any further easing by the BOJ.
That would leave the bank sticking to its current easing for now. Kuroda said negative rates could still go lower if needed. But the majority view among economists polled by Bloomberg before the meeting is that the BOJ’s next eventual move will a reining in of its stimulus.
“The BOJ is less pessimistic than before and aware of the need of policy normalization in the future, as can be seen by slightly more detailed comments on side effects from Kuroda today, but they are not in a rush at this point,” said Masamichi Adachi, chief Japan economist at UBS Securities and another ex-BOJ official.
--With assistance from Yoshiaki Nohara, Yuko Takeo, Shoko Oda, Keiko Ujikane, Go Onomitsu, Sophie Jackman, Yusuke Miyazawa, Masahiro Hidaka, Gearoid Reidy and Lily Nonomiya.
To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Sumio Ito in Tokyo at sito58@bloomberg.net
To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Michael S. Arnold
©2019 Bloomberg L.P.