Bank of Japan Ramps Up Stimulus With Pledge for Unlimited Bond Buying
BOJ increased its scope for buying corporate bond & commercial paper by more than doubling its ceiling on holdings.
(Bloomberg) -- The Bank of Japan ratcheted up its stimulus Monday in tandem with government measures aimed at preventing the world’s third-largest economy from a virus-triggered collapse.
The central bank promised to buy as many government bonds as needed and more than doubled its buying of corporate debt, as Governor Haruhiko Kuroda tried to show the BOJ was pulling its weight in national efforts to support struggling factory owners, shopkeepers and consumers.
Still, Kuroda found himself defending the efforts of the central bank during a briefing after the decision. He also acknowledged that achieving 2% inflation would no longer be part his legacy after a decade at the helm of the bank.
The BOJ decision comes at the start of a week featuring meetings by the Federal Reserve and the European Central Bank. Both global peers have taken bold action at emergency gatherings in recent weeks leaving the impression that the BOJ’s juggernaut easing program is now running more on fumes than gasoline.
“If you look at what we’re doing from the size of our balance sheet against GDP to our measures compared to the size of the commercial paper and corporate bond markets, the scale of the Bank of Japan’s easing is far larger than any other central bank,” Kuroda said at the briefing.
Market reaction was mixed. The Nikkei 225 stock index added to gains, finishing up 2.7%. The yen strengthened against the dollar to 107.05 during Kuroda’s briefing, from around 107.48 immediately before the decision. The slight appreciation of the yen suggested some market players may have viewed the easing moves as less than expected.
BOJ’s key moves
- Pledges to buy the amount of bonds needed without limit
- More than doubles the size of corporate bond and commercial paper purchases to 20 trillion yen
- Effectively offers to pay a 0.1% interest rate on loans under its new fund supplying operation
- Allows household debt as collateral for the funding operation
- Stops linking forward guidance with price momentum
The bank had come under increasing pressure to expand its unprecedented monetary stimulus as the coronavirus hammers the world economy. By ditching a guideline to increase holdings of government debt by around 80 trillion yen ($743 billion) per year, the BOJ can now make unlimited purchases at a time when record public spending will require new bond issuance to pay for it.
“Impressions matter in this kind of crisis. While the BOJ’s balance sheet is, of course, much bigger than its peers, the response to this kind of crisis is very important. If you look at that, the BOJ hasn’t been as aggressive compared with the Fed,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official.
The additional measures announced by Kuroda’s board do show a greater degree of fiscal-monetary policy coordination, with Prime Minister Shinzo Abe’s adminstration finally submitting an extra budget Monday for its stimulus of more than $1 trillion.
“The government and the Bank of Japan are truly strengthening policy coordination,” said Japan’s economy minister, Yasutoshi Nishimura, following his attendance at the BOJ decision.
Still, the progress of the government’s measures also points to a tardy response. Japan’s cash handouts are only expected to start in May in stark contrast with some other major economies. The U.S. has already passed multiple packages totaling almost $3 trillion.
BOJ Has Perfect Cover to Ditch 80 Trillion Yen Bond Purchase Aim
It also remains in question how Monday’s move will actually change the BOJ’s bond purchases as the central bank hasn’t bought at a pace anywhere near its 80 trillion yen guideline in recent years. The current yield curve control program doesn’t require a surge in purchases as long as 10-year bond yields stay around 0%, so the removal of a numerical target adds flexibility to buy more now, and possibly less in the long run.
While the BOJ took action to help companies and avoid causing more pain to the banking sector, its pledge on bonds is not a pure pledge to buy an unlimited amount of bonds to fund free spending, said Kyohei Morita, chief Japan economist at Credit Agricole Securities Asia BV.
“I don’t characterize this as a step forward toward helicopter money. We are not at a point where the government will be deciding how much the BOJ needs to buy,” he said.
Kuroda also denied that the BOJ was simply financing government debt.
Painful Prices
In its quarterly outlook report, the BOJ made sweeping downgrades across projection years through March 2023, forecasting an economic contraction of up to 5% this fiscal year. It predicted inflation to be as weak as 0.4% at the end of the forecast period, dashing hopes that Japan might reach the bank’s 2% price target before Kuroda is due to step down that April.
Kuroda said the price goal was still intact, despite the BOJ’s latest forecast that prices could fall by as much as 0.7% over the 12 months to next March.
The governor said price momentum had been lost for now, an admission that previously would have triggered intense speculation that the BOJ would lower its negative interest rates. Instead the bank kept both its short-term and long-term rates on hold and once again added to its promises to do more if needed.
What Bloomberg’s Economist Says
“The measures will allow the central bank to do more to prop up Japan Inc. and support fiscal stimulus. The primary objective appears to be to provide sufficient assistance to head off any surge in bankruptcies that could cripple longer-term prospects. The reflation effort is now on hold.
--Yuki Masujima, economist
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