Kuroda's Yield Flexibility Sets Up Market Test Amid Dovish Tide
The BOJ maintained its interest rates and asset purchases.
(Bloomberg) --
As peers in the U.S. and Europe take a dovish turn, Bank of Japan Governor Haruhiko Kuroda signaled he’s unfazed as yields in his own country get caught up in the global shift lower.
"There is no need to be extremely and strictly mindful about a concrete range for the rate" on Japan’s benchmark 10-year bond yield, Kuroda said. The BOJ targets that rate to be about 20 basis points plus or minus zero. His flexibility egged on buyers, with the yield pushing as low as minus 0.18% as he spoke during an afternoon news conference.
The market is likely to test just how flexible Kuroda is in the days and weeks ahead.
"The BOJ is trying to secure a free hand," said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. "But it’s gradually becoming more difficult because other central banks, namely the Fed and ECB, are indicating they will act and they have measures to do so, whereas the BOJ’s toolbox is nearly empty."
The BOJ kept its benchmark interest rate at -0.1% and 10-year yield target at around 0% earlier in the day. Hours before that, the Federal Reserve followed the European Central Bank in signaling a willingness to cut rates in the face of rising threats to global growth.
The dovish tide was on display elsewhere in Asia on Thursday.
Almost 5,000 miles to the south in Adelaide, Reserve Bank of Australia Governor Philip Lowe reiterated that it was “not unrealistic” to expect another rate cut there. The quarter-point reduction to a record-low 1.25% this month was unlikely to “materially shift” the current trajectory of slower economic growth and static unemployment, Lowe said in a speech.
Indonesia’s central bank signaled it’s ready to cut rates after adding stimulus to the economy by lowering reserve limits for banks. But economists’ expectations for a cut in the Philippines were dashed as the central bank held rates steady after inflation quickened last month. In Taiwan, the central bank kept its benchmark rate unchanged as expected.
Fed Trigger
Economists surveyed by Bloomberg unanimously forecast no change at today’s BOJ meeting, but for the first time in more than two years, a majority had predicted the BOJ’s next policy move will be to increase stimulus. Some see action as early as next month.
Many BOJ watchers say Fed rate cuts, seen as increasingly likely, could force the BOJ’s hand by pushing the yen to what it would consider an uncomfortably strong level.
A stronger yen would hamper the BOJ’s efforts to hit 2% inflation. Core inflation, to be released Friday, is expected to have fallen in May to 0.7% and is forecast to drop further in coming months. The dollar fell to as low as 107.47 versus the yen Thursday in Tokyo, paring losses after Kuroda’s news conference.
Again, Kuroda expressed comfort with taking a wait-and-see approach, saying that in the end a Fed cut may not have much of an impact if the markets have already priced it in. "At any rate, monetary policy isn’t targeted at foreign exchange rates," he said.
BOJ’s Dilemma
Still, Kuroda reiterated that the BOJ stands ready to add stimulus if momentum toward its 2% inflation goal is threatened. But it won’t be that simple. The BOJ also faces concerns about the accumulation of side effects from six-plus years of radical stimulus.
In any case, many economists doubt the BOJ could even have much impact with whatever it chose to do. Its toolbox is almost empty -- complicating the risk-reward scenario.
Japan’s trade-dependent economy showed some resilience in the first three months of the year, but some economists are warning of a contraction in the current quarter. Exports fell for a sixth-straight month in May, data released Wednesday showed.
The BOJ still expects conditions to improve in the second half of the year, but escalating trade tensions are heightening concerns about global demand among policy makers and businesses.
--With assistance from Russell Ward, Yoshiaki Nohara, Shoko Oda, Shiho Takezawa, Sophie Jackman, Lily Nonomiya, Brett Miller, Go Onomitsu, Emi Urabe, Kyoko Shimodoi, Yuko Takeo and Saburo Funabiki.
To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net
To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig, Paul Jackson
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