When Bank of Japan Governor Haruhiko Kuroda spooked markets with talk of winding down the bank’s crisis-mode stimulus, he was describing a goal on the distant horizon — not warning of an imminent shift, say sources familiar with his thinking.
But they say starting discussion of an exit from ultra-loose policy is seen as crucial given the rising cost of easing and the need to give Japanese policymakers some ammunition in case there is another crisis.
Kuroda’s comments — and those of a future deputy — show how the central bank is softening up investor opinion in advance of what will be one of the priorities of his second term as bank governor.
“It’s a tricky process that could take years,” said one of the sources familiar with the central bank’s thinking. “The timing of an actual lift-off really depends on how inflation performs.”
To underscore that the central bank is in no rush to dial back stimulus, Kuroda said his top priority would be to meet his 2 per cent inflation target, noting that current inflation, at 0.9 per cent in January, remained far from that goal.
The bank must also balance how its moves will be viewed domestically versus globally. Japanese investors saw Kuroda’s remarks as stating the obvious and barely reacted.
Overseas investors reacted more strongly, selling bonds and buying yen as they speculated stimulus would end sooner rather than later.
The Bank of Japan is already well into what analysts call “stealth tapering” as it slows annual bond buying to nearly half the pace it loosely pledges.
“The biggest challenge Kuroda faces in his second term is how to unwind the unconventional steps he took in the first five years,” said Takahide Kiuchi, who served at the BoJ board until July.
The yen and Japanese bond yields spiked when Kuroda told parliament there was “no doubt” the BoJ would “consider and debate” an exit if inflation hits his target during the fiscal year that runs from April 2019 to March 2020.
Masayoshi Amamiya, slated to become one of Kuroda’s two deputies this month, echoed those comments. “If the time comes, we’re quite capable technically to gradually and stably adjust interest rates while ensuring markets remain stable,” he said.
The sources warn against reading too much into those remarks, noting that the threshold for even debating an exit remains high.
Although the central bank’s board predicts inflation will hit 2 per cent during fiscal 2019, a poll showed market economists expect inflation to stay at half that level. — Reuters
Oman Observer is now on the WhatsApp channel. Click here
