Bank of Japan Tapers by Stealth First and Explains Later
The Bank of Japan is taking a stealthier approach than its peers to winding back pandemic stimulus without rattling markets.
As the BOJ, Federal Reserve and others convene meetings this week, the Japanese are, on some fronts, already ahead of the pack after sharply cutting back purchases of exchange traded funds and trimming buying of corporate bonds.
The ETF move was flagged after the fact in March. The scaling back of corporate debt purchases already under way could be formally announced on Friday.
In sharp contrast with the Fed’s heavy telegraphing of its intentions to avoid a repeat of the 2013 taper tantrum, the BOJ acts first, then characterizes its moves later, if at all.
Governor Haruhiko Kuroda’s approach helps maximize the BOJ’s room for maneuver at a more sustainable cost without upending markets.
“The whole tapering debate is something the BOJ avoids,” said Hideo Kumano, executive chief economist at Dai-Ichi Life Research Institute. “In a way you can say that what they are doing, they are doing pretty well.”
Kuroda launched a bazooka of stimulus back in 2013 to spark inflation in Japan and amassed a pile of assets bigger than the size of the economy, but the initial aggressiveness of the program has long since been watered down.
The BOJ scrapped its 80 trillion yen ($700 billion) annual bond buying guideline four years after it started purchasing much smaller amounts. The bank’s bond holdings have fallen so far this year, according to BOJ data.
Despite an intense burst of ETF buying at the height of pandemic-induced market turmoil, the BOJ hasn’t been on track to purchase 6 trillion yen of the funds since 2018. It ditched that target in March this year.
The bank’s corporate debt buying has been lower since December 2020.
By avoiding a conventional tapering debate, the BOJ’s so-called stealth tapering gives it scope to ramp up buying again at short notice if needed.
Kuroda has repeatedly refuted the idea that the bank is doing any tapering, suggesting it’s absurd to even discuss the notion when inflation in Japan, unlike in other major economies, remains far from its 2% target. Key consumer prices edged up just 0.1% in October.
The central bank’s more flexible approach on asset purchases helps it reduce side effects so it can keep buying over the longer haul, the BOJ has indicated.
While investors haven’t always swallowed the BOJ’s characterizations of what it’s doing, the BOJ’s strategy has continued without roiling markets.
The BOJ has more flexibility in its approach than other developed market central banks, according to Freya Beamish, head of macro research at TS Lombard.
“That facilitated a stealthy early withdrawal for the BOJ. In contrast, the Fed is now left in the position of accelerating its taper and communicating that in a way that doesn’t derail equity markets,” she said.
Ultimately, market participants have realized that action speaks louder than words.
“It’s easier to know what the BOJ is doing by watching rather than listening to them,” former BOJ chief economist Hideo Hayakawa said. “In a way, the BOJ has been done with tapering for some time.”
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