Japan's Liquidity Woes Risk Limiting BOJ to Tinker on Sidelines

(Bloomberg) -- Haruhiko Kuroda took charge at the Bank of Japan declaring an “incremental” approach to stoking inflation should be abandoned. Six years on and still a long way from his price goal, the governor has been forced to tinker with little-noticed funding programs in a bid to sustain his stimulus program.

The key challenge: negative side effects of Kuroda’s original initiative -- massive asset purchases -- are piling up. Traders continue to warn about depressed liquidity in Japanese government bonds (JGBs), while major institutional investors are pushed into riskier assets to an extent that’s stoked regulatory concerns.

While the focus of last week’s policy meeting was fresh wording on the time frame for maintaining ultra-low rates, the other tweaks showcase the BOJ’s dilemma: how to convince observers that it’s still pursuing its inflation target while limiting the damage.

“The fact that the BOJ had to rely on complicated measures like these indirectly show that it has limited tools left for easing,” JPMorgan Chase & Co. rates strategists Takafumi Yamawaki and Shumpei Kobayashi wrote in a note on the meeting.

The tweaks included:

• The minimum fee for the BOJ’s securities lending facility, which was set up in 2004 to help ensure market players can obtain government securities if needed, will be cut in half, to 0.25 percent. This should reduce the cost of shorting JGBs, JPMorgan says.
• Looser collateral rules for providing credit to financial institutions. For example, corporate debt rated BBB, the lowest tier for investment grade, will now be accepted. One implication is that securities other than JGBs will be used more as collateral.

Diminishing liquidity in the JGB market has been an increasing concern of the BOJ, thanks to the central bank having amassed more than 40 percent of the total outstanding. Officials began regular surveys of liquidity in 2015 -- which have been steadily enhanced -- and met with market participants to hear their complaints and suggestions.

The latest moves follow a trimming back in BOJ bond purchases and widening in the tolerance band around the 10-year yield target of around zero adopted in 2016. Yet without a rise in yields, the changes may not be sufficient to encourage domestic funds to return. Institutional investors such as insurers have instead gone abroad.

Another challenge is that the BOJ has committed to keep expanding Japan’s monetary base until inflation exceeds its 2 percent target (The most recent reading was 0.8 percent). And that growth rate has been coming down thanks to the reduced bond purchases.

That may help explain why policy makers extended until at least June 2021 two loan-support programs rolled out by Kuroda’s predecessor, Masaaki Shirakawa.

• The Growth-Supporting Funding Facility was rolled out in June 2010, joined by the Stimulating Bank Lending Facility in October 2012, providing low-cost funds with the aim of channeling more credit to companies. Amendments are now pending that will make it easier for banks to tap the first program.
• Kuroda’s board enlarged these programs in 2014, saying it would make use of the enhanced liquidity being poured into the economy through quantitative easing. Yet they were never core to his efforts, facing one-year expirations until last week’s tweak.

The adjustments mark a contrast from Kuroda’s QE, which was complemented by a negative short-term policy rate in 2016 and yield-curve control that same year. The governor in April 2013 said “it’s true that the price target won’t be easy, but we can’t meet it by incremental easing,” and reiterated his opposition to incremental moves in 2014 and 2016.

In its April 25 statement, the BOJ described the adjustments to its legacy programs as “contributing to the continuation of powerful monetary easing.”

Naohiko Baba, chief Japan economist at Goldman Sachs Group Inc. in Tokyo, had a rather more prosaic description: “a combination of new technical measures.”

To contact the reporter on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Malcolm Scott, Enda Curran

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