Kuroda Leads Japan’s Effort to Soothe Market’s Virus Jitters
BOJ’s Kuroda Vows to Maintain Market Stability in Statement
(Bloomberg) -- Haruhiko Kuroda helped lift Japanese stocks for the first time in six trading days by issuing an emergency Bank of Japan statement following a week of turmoil in markets over the implications of the spreading coronavirus outbreak.
In the release, which came after the Federal Reserve hinted at possible rate cuts in an unscheduled statement on Friday, Kuroda said the BOJ “will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”
BOJ Buys ETFs at Four Times Target Pace to Back Kuroda’s Vow
The BOJ quickly showed what kind of action it would take by offering to buy 500 billion yen ($4.6 billion) of government bonds with repurchase agreements to provide liquidity to market participants. Figures released later in the day showed that the central bank also bought a record amount of stock funds.
Japanese shares closed the day with a gain of 1% after the statement triggered a reversal from earlier losses and weakened the yen.
Markets elsewhere in Asia also gained, supported by the growing signs of central bank help at hand. China’s CSI 300 Index rose more than 3% even after the country saw a much deeper contraction in manufacturing than economists had expected. Indexes in Hong Kong and South Korea also showed gains of around 0.8%.
The BOJ move is the latest attempt by global policy makers to calm market jitters by promising action in response to swelling fears over the impact of the virus as it spreads beyond Asia to Europe and the U.S. The S&P 500 shed 11.5% last week for its biggest drop since the global financial crisis, while Japan’s benchmark Topix gauge suffered its worst weekly decline in four years.
Investors are pricing in increased support from monetary authorities from Washington to Sydney as the global death toll from the coronavirus surpassed 3,000.
They may not get it imminently. European Central Bank policy maker Francois Villeroy de Galhau, who heads the Bank of France, said on Monday that “we are vigilant, we are mobilized, but we remain calm and proportional in the responses we need to have.”
Economists said that while the BOJ showed it was prepared to take action to reassure investors and maintain liquidity in markets with the move, the signal from the central bank still wasn’t as strong as the Fed’s last week.
“The difference is that the BOJ emphasized it’s taking actions for the stability of markets while the Fed suggested further easing. Today’s statement doesn’t change my view that there is no easing in coming months,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co.
Analysts think Japan’s economy, already weakened by slow global demand and a sales tax hike, is falling into recession as the virus hits. But policy makers in Tokyo are in a tight spot should they need to throw a real lifeline to its economy.
Prime Minister Shinzo Abe shuttered schools throughout the nation from Monday and said he would work on legislation to allow the government to declare a state of emergency. But he may be reluctant to draw up significant new spending measures with the ink barely dry on the last extra budget unless the economic damage becomes clearer or if the staging of the Olympic Games is threatened.
On Saturday he called for a second emergency package to deal with the virus to be compiled within about 10 days. But the scale is likely to be very small at this stage given that he has only earmarked the use of existing budget reserves.
But factor in a prolonged epidemic and a cancellation of the Olympic Games and analysts’ worst-case scenarios call for aggressive government spending and even bank bailouts to stop the derailing of the economy and destabilization of the financial sector.
Abe’s economic adviser Etsuro Honda has called for a much bigger economic package with fresh spending of 5 trillion yen ($45 billion).
Additional measure of that scale seem unlikely anytime soon, given the proximity of the 13 trillion yen ($120 billion) stimulus package announced in December. Bringing forward spending that has already been budgeted is more realistic, according to people familiar with the matter.
The government is likely to first consider support for the tourism industry and for companies looking to relocate factories away from China among other smaller-scale measures, according to one of the people.
Hard Place
Kuroda, meanwhile, is already seen at the limit of a massive easing program that has mounting side effects. Moves at this stage are more likely to focus on calming markets rather than protecting the economy.
The size of the BOJ’s balance sheet towers over that of the Federal Reserve and the ECB. Last year it resorted to verbal messaging rather than the rate cuts of the Fed and other central banks as a global slowdown threatened growth. It may have run out of extra words it can credibly employ to promise more readiness to act without actually doing anything.
While Powell has hinted at a rate cut to come, some other central bank officials, including European Central Bank chief Christine Lagarde, have warned global leaders against simply cutting interest rates in response to the virus, given doubts over the effectiveness of that response for the real economy.
Still, the longer the epidemic disrupts supply chains, shuts down factories and stops tourists from coming and going, the more pressure will build on Japan’s policy makers to do more. Naka Matsuzawa, chief strategist at Nomura Securities sees a chance of additional easing by the BOJ in April.
What Bloomberg’s Economist Says
“It looks increasingly likely that the BOJ will adjust is forward guidance at its next board meeting to signal readiness to help the economy ride out the virus impact.”
--Yuki Masujima, economist
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Economists see the yen as one of the key factors for assessing how willing the BOJ will be to engage its main policy levers, should the jitters surrounding the virus outbreak deteriorate further. If the yen strengthens, it will hammer the profits of Japan’s biggest exporters while pushing down on prices through cheaper imports.
“I think the BOJ will be on high alert should the dollar yen fall below 105,” said Yuichi Kodama at Meiji Yasuda Life Insurance, noting the increased likelihood of Fed rate cuts could strengthen Japan’s currency.
The yen was trading around 108.26 against the dollar at 3:15 p.m., having weakened from 107.46 immediately before the BOJ released its statement. Economists surveyed by Bloomberg in January see 100 as the central bank’s line in the sand for lowering its negative rate.
Lower rates come with a cost, though, as they would increase the squeeze on profitability in Japan’s banking sector. That keeps the hurdle high for such a move and encourages the search for alternative approaches.
Stock Option
One possibility would be to ramp up the central bank’s buying of stock funds. Equities have so far taken the biggest hit from fears over the virus impact. The BOJ already has a very flexible target of 6 trillion yen per year for buying exchange-traded funds.
A formal increase in that target could invite further criticism that the BOJ is simply propping up stock prices with its purchases. A softer alternative would be to hint at making greater use of the flexibility of the target.
Still, the BOJ is likely to hold off from any more major action for now, instead preferring the government to make the first move to support the economy. In the meantime, it can continue to offer smaller scale moves like Monday’s.
“It’s tough to deal with this type of economic hit for policy makers,” said Shigeto Nagai, head of Oxford Economics in Tokyo and former head of the BOJ’s international department. “Japan is especially in a tough spot as it hasn’t fully recovered from the tax hike last year.”
--With assistance from Chikako Mogi, Yoshiaki Nohara and Jason Clenfield.
To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net
To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Paul Gordon
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