BOJ Deploys Words Instead of New Policy Action to Fight Slowdown

(Bloomberg) --

The Bank of Japan resorted to words rather than fresh policy action in dealing with the effects of a global slowdown and limp inflation, in contrast to the response of interest-rate cuts by the Federal Reserve and other central banks around the world.

The BOJ left its main policy tools untouched Thursday, judging conditions in markets, prices and the economy didn’t necessitate additional stimulus. Instead, it strengthened the wording on its policy pledge on interest rates, flagging the possibility that they could go lower.

The central bank now says it expects short- and long-term rates to remain at current or lower levels as long as attention needs to be paid to the possibility of losing price momentum. It dropped a time frame of keeping rates extremely low until at least around spring 2020, giving it wiggle room to leave policy unchanged for longer without additional explanation.

“The change in the guidance reflects the BOJ’s agony of having little room for further easing. It’s wrong to interpret it as a sign of a more positive stance on additional easing,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG and a former BOJ official. “The BOJ is trying to buy time and maintain expectations for more stimulus.”

Markets showed little response. The yen was up a smidgen in Tokyo on Thursday afternoon, little changed from before the BOJ announcement. The Topix index closed up 0.1%, also little changed from before the policy release.

The BOJ’s decision came hours after the Fed cut rates for the third time this year and Chairman Jerome Powell signaled he may pause for now -- a move that relieves pressure on his Japanese counterpart Haruhiko Kuroda, who all year has faced the prospect that his inaction relative to Powell’s would strengthen the yen. A stronger currency would further weaken exports and weigh on inflation through lower import prices.

In a briefing after the decision, Kuroda said he still has room to make further reductions to negative interest rates if needed. He argued he has more scope to move on that front than the European Central Bank, which has already pushed its rate down to -0.5%.

“We still think it’s possible for Japan to cut negative rates deeper if needed, and we don’t think negative 0.1% is the bottom,” Kuroda said.

More Words

Kuroda’s move to guidance describing low or lower rates looked straight out of the playbook of outgoing ECB President Mario Draghi. Kuroda and Draghi go back a long way, having worked on coordinated currency action in the early 2000s.

The key difference between the ECB and the BOJ, recently at least, is that the eurozone’s central bank tends to take action after it signals it, as seen in September, while Japan’s central bank holds back.

The BOJ is straining to maintain the impression that it’s still genuinely prepared to add stimulus to spur inflation if needed, and that it has the ammunition to do so. With interest rates already negative and a bond-buying program far bigger in scale than those of its global peers, the BOJ must battle against perceptions it’s running out of policy ammunition.

“By changing the forward guidance, we made clear our stance that we will conduct our policy operation with more emphasis on easing,” Kuroda said at the briefing. “It’s not that our easing stance is backpedaling.”

Keeping Momentum

Expectations that the central bank might take additional action had mushroomed after the BOJ called for a review of prices at its previous meeting in September. Those expectations cooled ahead of this month’s meeting as markets remained benign and media outlets including Bloomberg reported the board was leaning against additional stimulus.

After reexamining the impact of the global slowdown on Japan’s economy and prices, the bank decided that no major policy action was needed. It said the possibility of losing momentum toward its price target had not increased any further, though it was necessary to keep closely watching the situation.

Since the September announcement of the review, a truce in the U.S.-China trade war has reassured markets and economic data for Japan has also shown domestic demand holding firm. With stocks near an 11-month high, the yen weaker and 10-year bond yields back in the BOJ’s preferred trading range around zero, the central bank effectively gained breathing space to hold off on action.

Yet, inflation has continued to slow, with the key price gauge at 0.3% in September, well away from the bank’s 2% target. The bank lowered all of its forecasts for economic growth and inflation at Thursday’s meeting in its quarterly outlook report.

What Bloomberg’s Economists Say

“The change in the Bank of Japan’s forward guidance puts the focus more squarely on the output gap and inflation expectations in determining the policy course. In our view, both are holding up, and -- as long as they continue to do so -- the BOJ should be able to navigate the current growth slowdown without cutting rates.”

Yuki Masujima, economist

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Policy Recap

• A rate of -0.1% on some reserves financial institutions keep at the central bank.
• Yield target of about 0% for 10-year Japanese government bonds, with a trading range of about 0.2 percentage point on either side of the mark.
• A target of increasing JGB holdings by about 80 trillion yen ($739 billion) a year is now secondary to controlling interest rates. The actual pace of purchases has fallen to well below half that rate.
• A guideline to increase holdings of exchange-traded funds by 6 trillion yen a year. Actual purchases vary widely from month to month, depending on market conditions.

--With assistance from Yoshiaki Nohara.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Sumio Ito in Tokyo at sito58@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Malcolm Scott, Jon Herskovitz

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