Haruhiko Kuroda, governor of the Bank of Japan (BOJ), gestures as he speaks during a news conference in Tokyo, Japan. (Photographer: Kiyoshi Ota/Bloomberg)

Kuroda Says Signal for Stimulus Exit Would Be Change in Target Rate

(Bloomberg) -- Look to bond yields and not asset purchases for the first sign that the Bank of Japan is finally ready to start exiting its years-long monetary stimulus, Governor Haruhiko Kuroda said in an interview.

Kuroda’s statement offered the clearest glimpse yet of what an exit will look like one day, though he stressed that policy settings will remain at their current levels for now.

Kuroda Says Signal for Stimulus Exit Would Be Change in Target Rate

“When 2 percent inflation target is met or is close to be met, of course we can change the target, the monetary operating target of interest rate,” Kuroda said when asked in an interview with Bloomberg television how the central bank would signal an exit. “At this moment, inflation is only 1 percent, so we will continue the current yield curve control at the current level of interest.”

Asked in a follow-up question to confirm that a change in the interest rate would be a definite signal of a policy shift, he said: "That’s right."

Kuroda has been reluctant to explain in any detail how the bank might go about exiting its stimulus. His previous comments on the subject have caused sharp movements in the yen and bond prices. In March, the yen surged when he said the BOJ may find itself thinking about exiting its stimulus in the year starting in April 2019.

Exit Speculation

Economists and market participants have continued to point to the sharp slide in the bank’s purchases of Japanese government bonds as indicating it’s turning toward normalizing monetary policy, or even already conducting "stealth normalization."

Kuroda said people should focus on the bank’s yield curve control and not the amount of bonds the bank is buying as a potential signal for an exit, further underscoring that a promise to buy 80 trillion yen of Japanese government bonds each year was now only symbolic. The bank’s purchases are now close to half that pace.

“It’s only yield curve control,” he said. “The amount of JGB purchases is no more the monetary operating target.”

Given the BOJ’s focus on yields, it’s natural that any move toward an exit would involve a rise in those yields, said Shinichi Ichikawa, chief market strategist at Credit Suisse Securities Ltd. But that will also make an eventual exit riskier for Japan than for the Federal Reserve, because it’s harder to raise yields in increments than it is to cut bond purchases, Ichikawa said.

"When the Fed moved toward an exit what they did was they slowly reduced the purchase amounts," he said, referring to the Federal Reserve. "That was possible because the U.S. clearly targeted the purchasing amounts. But it’s trickier for Japan."

Longer Haul

In July, Kuroda and his board made the most significant tweaks to their policy framework in two years in a bid to make stimulus more sustainable. The bank also said it would keep interest rates extremely low for an extended period of time, helping calm speculation that a policy change could be on the horizon amid rate hikes in the U.S. and moves toward tighter policy in Europe.

Most economists now don’t expect the BOJ to change policy until at least 2020, but they are still keen to know how the bank will signal its intentions.

The central bank controls short- and long-term interest rates by applying a -0.1 percent rate on some commercial banks’ deposits at the BOJ and by buying bonds to keep the yield on 10-year government bonds at about zero. Through these rates the bank ensures yields across a wide range of time frames remain extremely low.

Critical Wages

Sporting a batik shirt on the sidelines of the International Monetary Fund’s annual meetings in Bali, Indonesia, Kuroda said a continuation of recent wage gains would be "critical" in the BOJ’s quest to reach its inflation target of 2 percent.

“Basically I think wages would be the main sustainable factor for inflation,” he said, noting that wage growth had been accelerating in recent months. "Whether this continues or not is very critical for the 2 percent inflation target.”

Speaking on some of the big issues discussed at the IMF meetings in Bali, Kuroda said trade conflicts were a frequent topic, though no clear conclusions were reached about how to resolve them. Still, he said he expected the U.S. and China to eventually reach a compromise, as trade wars tend to hurt all countries involved.

Touching on currencies, Kuroda said the dollar, yen and euro were at levels not far from those justified by economic fundamentals. U.S. Treasury Secretary Steven Mnuchin has called for a currency clause that would prevent competitive devaluations to be included in any trade agreement with Japan.

Sales Tax

Kuroda said Japan’s sales-tax increase scheduled for next October wouldn’t have the same effect on the economy as the hike in 2014. The rise set for next year would be only 2 percentage points and food would be excluded, he noted, so the impact could be as little as one third or a quarter of that from the 2014 tax hike.

The government’s planned spending on free education and care for young children should also help, he said.

©2018 Bloomberg L.P.