BOJ Has Hit Normalization Limit Under Kuroda, Ex-Official Says

The Bank of Japan has done everything it can to normalize policy under Governor Haruhiko Kuroda’s watch and is now set to ride out the rest of his term without any major changes, according to a former senior central bank official.

“The BOJ has reached the end of the line on normalization for now,” said Hideo Hayakawa, referring to a series of tweaks to the central bank’s stimulus framework in March that enabled it to cut back its asset buying.

BOJ Has Hit Normalization Limit Under Kuroda, Ex-Official Says

“Unless the current leadership suddenly says it’s gotten policy wrong all this time, it’s pretty much done all it can,” the former executive director said in an interview, adding that the pandemic has underlined the importance of fiscal policy in helping the economy rather than a monetary approach.

Hayakawa’s comments suggest that the BOJ will remain in a holding pattern on policy until at least April 2023 when Kuroda is scheduled to leave. They also tally with the view of some economists that the central bank’s adjustments were intended to make it easier to dial back stimulus.

The BOJ says the fine-tuning was aimed at making its stimulus more sustainable over the longer term after its biggest policy review since 2016. Around half of economists agree that the tweaks shored up the stimulus framework, but about 40% see them as a step toward policy normalization, according to a Bloomberg survey.

A key point of the adjustments was making the buying of exchange-traded funds more flexible, Hayakawa said. The BOJ had already made its bond buying more flexible by changing its focus to interest rates in 2016 and by removing a purchase guideline last year, he said.

The ETF buying had attracted increasing criticism that the bank was helping prop up stock prices already at three-decade highs.

The bank demonstrated its new flexibility on Tuesday when it didn’t buy ETFs for the first time since at least 2016 even after the Topix stock index fell more than 1% in the morning session. On Wednesday the bank did buy ETFs, but only after stocks dropped 2.2% in the morning.

“It’s not worth making problems bigger and bigger through massive bond or ETF buying,” said Hayakawa, who left the bank in 2013 and has generally taken a skeptical view of Kuroda’s efforts to reflate the economy. “Those purchases aren’t bringing the bank any closer to its inflation target.”

Hayakawa also said:
  • Given Japan’s low growth potential, having a price target of around 0% is more appropriate than 2%
  • Many central banks are undershooting their price targets in recent years; the global perception that central banks need a 2% goal could change as suddenly as the recent shift in views away from cutting corporate taxes
  • What Japan’s economy needs most now is a quicker vaccine rollout; the delay is causing a K-shaped recovery that favors manufacturers while face-to-face service providers continue to struggle
  • The introduction of lending incentives by the BOJ “is nothing more than posturing” and won’t help the profitability of banks much while interest rates are ultralow

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.