Kuroda Says BOJ Has Enough Ammunition, Wary of Side Effects

(Bloomberg) -- The Bank of Japan can deliver more big monetary stimulus if necessary, but needs to take care with its side effects on the financial system, said Governor Haruhiko Kuroda.

The BOJ will ease further if momentum toward its 2% inflation target is lost, Kuroda said in an interview with Bloomberg TV’s Kathleen Hays in Fukuoka, Japan, where central bankers and finance chiefs from the Group of 20 met over the weekend. The governor emphasized that the BOJ doesn’t need to act now, citing the health of the economy.

Kuroda’s comments come after Federal Reserve Chairman Jerome Powell signaled a willingness to act if the economy needs it, European Central Bank President Mario Draghi vowed to support growth and People’s Bank of China Governor Yi Gang told Bloomberg in a separate interview that he has "tremendous" policy options to stoke demand.

"Like Mario Draghi, I think we can do these things if necessary," Kuroda said.

While economic growth data released Monday provides some support to Kuroda, inflation is still less than halfway to his goal and investors question whether the BOJ’s ultra-aggressive stimulus program is sustainable. The BOJ’s program compromised the bond market’s function for pricing risk and low yields are squashing profits at commercial banks.

Asked if the BOJ still has the capacity to do "something big," Kuroda said: "I think so.” He cited four policy options: cutting the -0.1% negative rate further, lowering the target for 10-year yields, increasing the monetary base or boosting asset purchases.

"If the momentum to our 2% inflation target is lost, then of course, the Bank of Japan will swiftly respond by changing our policy," Kuroda said.

The yen weakened immediately after publication of the governor’s remarks, falling to as low as 108.68 per dollar.

Kuroda said the BOJ’s policy options will depend "particularly’’ on what is happening in financial markets.

The Fed is increasingly expected to cut rates this year, a move that would likely strengthen the yen. This has prompted more BOJ watchers to see additional easing as the central bank’s next move, given that a weak yen helps Japan’s efforts to spur inflation.

JPMorgan Chase & Co. last week said it now expects the BOJ to lower its negative interest rate to -0.3 percent in September.

Trade Risk

Even before the escalation in U.S.-China trade tensions in May, some economists had flagged the possibility of extra easing by the BOJ, given an unfavorable economic outlook and a sales-tax hike set for October. Previous increases in the tax have squeezed consumption and caused the economy to shrink.

The BOJ is widely expected to keep its policy unchanged at the end of its next gathering on June 20.

“The BOJ wants to be careful in adding stimulus because they don’t have many tools left and side effects are piling up,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Here are some of the other points made by Kuroda in the interview:

• He sees two areas of "potential risks" when it comes to side effects of BOJ monetary policy: The first is low yields pushing commercial banks into risky areas to find returns and the second is compromising their role as financial intermediaries.
• "At this moment, the situation is quite sustainable, but we have to carefully monitor the situation if we continue our yield-curve control.”
• "We may combine various monetary tools” to reduce harm.
• "The economy as a whole is doing well, but rural economies are suffering from decline of the population, decline of the number of companies, and so forth. So local banks are faced with this declining trend."
• The BOJ is watching the employment market very closely because it can have a big influence on inflation.
• The plan to raise the sales tax in October is understandable and the government has prepared many measures to offset any negative impact.

--With assistance from Yuko Takeo.

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

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