BOJ’s Kuroda Maximizes Flexibility Ahead of Crucial Two Months

Bank of Japan Governor Haruhiko Kuroda looked to keep all his options open for a policy review in March following two critical months that will likely determine whether the pandemic will ease or take a turn for the worse.

Speaking at a press briefing after the central bank left all of its main policy settings unchanged, Kuroda spent much of his time counting nothing out of the review into the mechanics of the bank’s stimulus program. The one point he insists will not change is the BOJ’s basic approach to stimulus.

“Yield curve control has worked appropriately and I don’t think the framework itself needs to be changed,” Kuroda said. “But from the standpoint of achieving more effective and sustainable monetary easing its operations are under review.”

BOJ’s Kuroda Maximizes Flexibility Ahead of Crucial Two Months

By keeping economists and investors guessing, the governor has bought time to decide on whether the review leads to something closer to an overhaul of policy to deal with a worsening crisis or whether some tweaks at the margins will be sufficient should the economic outlook be looking brighter by mid-March.

“Kuroda chose not to paint any picture of the policy review at this point,” said Kyohei Morita, chief Japan economist at Credit Agricole Securities Asia. “While Kuroda says it’s going to be a fine-tuning, the BOJ has already become a whale in every corner of Japan’s markets. What it says has a direct impact on those markets and creates big waves.”

Read More: BOJ Mulls Stimulus Mechanics as Covid Emergency Extends Timeline

Thursday’s meeting came with 60% of Japan’s economy in a state of emergency that the BOJ believes will deepen the contraction over the 12 months to March to 5.6%.

While the bank took a gloomier view of the current state of the economy amid record cases of Covid-19, the BOJ concluded that weaker growth at the end of the current fiscal year and a government stimulus package announced last month will result in a stronger rebound in the year starting April.

“The growth outlook, especially for fiscal 2021, has been lifted somewhat considering the impact of the government’s economic policy,” Kuroda said. “There is a high degree of uncertainty, though, because the outlook can change with the trajectory of the pandemic.”

BOJ outlook projectionsNew ForecastPrevious Forecast
Fiscal 2020 GDP-5.6%-5.5%
Fiscal 2021 GDP3.9%3.6%
Fiscal 2022 GDP1.8%1.6%
Fiscal 2020 CPI-0.5%-0.6%
Fiscal 2021 CPI0.5%0.4%
Fiscal 2022 CPI0.7%0.7%

By the time of the review, the BOJ should have a clearer picture of the outlook.

Kuroda said he had no preconceived ideas over what the review should conclude. He said it would look into the pros and cons of negative rates, asset purchases and the yield control mechanism. He said he wanted to enable the bank to respond more effectively and nimbly. Nothing had been decided on the acceptable movement range around the BOJ’s 10-year yield target, he added.

Excessively low yields for bonds beyond the long-term 10 year range can harm life insurers and pension funds, he said. Still, he wanted to keep the yield curve low until after the virus started to die down.

While continued consideration of the negative side effects of policy was needed, including the impact on the functioning of markets, Kuroda said that positive effects of the overall framework including its negative rates had outweighed the downside factors.

What Bloomberg Economics Says...

“The conclusions of the review -- due in March -- will likely hinge on the strength of the economy. The better outlook suggests any adjustments the BOJ makes will be aimed more at improving the quality of its stimulus rather than the quantity.”

-- Yuki Masujima, economist

For the full report, click here

Earlier in the day, Prime Minister Yoshihide Suga’s administration nominated another reflationist to the central bank’s board, helping to ensure policy continuity.

The nominee, 63-year-old economist Asahi Noguchi has ties with the board, having co-authored a 2007 book on economic policy with sitting BOJ deputy governor Masazumi Wakatabe, along with well-known Abenomics proponent Koichi Hamada.

Suga Government Nominates Reflationist Academic to BOJ Board (2)

On inflation, the BOJ kept its projection that price growth is unlikely to meet the bank’s 2% target before early 2023, when Governor Haruhiko Kuroda’s current term expires.

That was one of the main takeaways from the meeting, according to Credit Agricole’s Morita.

“Inflation isn’t going to hit the target in fiscal 2023 when Kuroda leaves the BOJ,” Morita said. “So the review is necessary to show a freshened-up approach before its next forecasts in April.”

©2021 Bloomberg L.P.

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