Kuroda leaves, Bank of Japan’s growing hawks eyes an unloved yield limit

Haruhiko Kuroda is nearing the end of his decade as Japan’s central bank chief. More of his top colleagues see a reason to lift Japan’s bond yield cap, a critical but controversial piece of his drastic monetary stimulus.

After years of low consumer demand, heavy money printing, and growing discontent about ultra-low interest rates and the rising cost of living, there has been a rare shift in the Bank of Japan’s (BOJ).

According to a dozen sources familiar with BOJ’s thoughts, the debate about how to lift a controversial limit on bond yields that was introduced as part of its yield curve control programme (YCC), in 2016, could pick up next year provided wages rise and economic risk remains contained.

Sources said that although no specific discussions on a policy shift are currently underway, many BOJ members prefer to remove the yield cap completely.

This would be bolder than the current market view of what the BOJ will do next – an increase in the tolerance limit for government bonds yields above 10 years.

Even if there isn’t an immediate change in BOJ thinking it could cause massive selling of Japanese bonds. This would have major implications on global markets.

One source said that widening the range will fuel speculation about a rate rise and cause a sell-off of bonds, instead of helping to address side effects of the yield caps. Two other sources agreed with this view.

Another source stated that there is a consensus among the BOJ about the fact that YCC could be modified one day. This would allow the BOJ to eliminate the cap.

Sources spoke under condition of anonymity because they were not authorized to talk publicly.

Japan’s central bank is facing a crucial moment after a turbulent year in the third largest economy on earth.

The consumer inflation rate is now at an all-time high of 42%, and it’s finally higher than the BOJ’s lofty 2% target. But that doesn’t mean households have been buying more and are cashing up.

The global supply pressures created by the Ukraine conflict and pandemic have been compounded by the collapse of the yen. This has led to a rise in prices for imported raw materials, and eventually household goods. Kuroda’s currency-weakening low rates of interest are now targets of public anger.

Yoshio Koitabashi (84 years old pensioner) says that everything in supermarkets has been priced higher. He claims that he cannot afford to purchase a fridge despite having saved every cent when shopping for food.

He said that the BOJ was not thinking of those who were weak. They do everything to please their rich friends.

Japan’s benchmark interest rate is among the lowest in the world, and has been so for many decades.

According to a poll conducted by Mainichi newspaper, 55% believed that the BOJ should revise current monetary ease. This is far more than the 22% who preferred the status quo.

Kuroda believes that ultra-low interest rates are needed in order to sustain a fragile recovery of the economy. However, other BOJ members are beginning to hint at a potential tweak to YCC.

Kuroda was able to hold the BOJ’s pro–stimulus group in power for much of Kuroda’s tenure. However, their influence is beginning to wane when Masazumi Wakatabe, his deputy and dovish governor, sees their terms expire early next year.

This leadership change would allow bureaucrats to move away from the controversial policies of their previous chief.

Shinzo Abe, the prime minister who appointed Kuroda BOJ Governor in 2013, was assassinated in July. He was an important proponent for massive stimulus and also lost political support from advocates of expanding monetary policy.

BOJ officials also are putting together the theory backbone of a possible policy shift. They released research to see if households and companies are beginning to change their aversion towards price increases.

One source stated that if inflation continues to rise, it is not a reason for interest rates to be kept at their current levels.

The BOJ requires more proof that wages will continue to rise. The BOJ might be able to take action if more evidence is available,” said another source. This view was also shared by three other sources.

Kuroda introduced huge asset-buying during his decade as president to try to increase inflation to 2%.

Recently, some of these measures were quietly reversed by the BOJ, slowing down asset purchases. Sources said that the next step is to return to a policy that only targets short-term rates. This could be a lengthy process, which could take many years.

The BOJ said that Japan’s massive debt makes an abrupt rate rise too expensive. They will be cautious and describe the change as a gradual shift toward normalisation of extraordinary stimuli, rather than full-blown monetary tightening.

However, policymakers know that they have limited time to deal with the enormous costs of BOJ’s insistence on defending its 0% yield limit, which has resulted in a reduction of bond market liquidity and bank margins being crushed, as well as a crippling sell-off of the yen.

Izuru Kato from Totan Research, Tokyo, said that a policy change is not a final deal. However, if there’s public anger about inflation, the BOJ might feel obliged to take action.”

Public discontent already puts the BOJ’s prostimulus camp in jeopardy. Two new members were added to the board’s nine-member roster in July, shifting the balance of doves andhawks.

Naoki Tamura, a former banker who is now a member of the BOJ’s board of directors, said in a recent interview that he was uncomfortable with current policies.

Hajime Takata (an economist, who has replaced an advocate for heavy money printing) stated that the BOJ should always consider an exit strategy in his initial briefing.

Takata said that he had seen positive changes in wages growth, despite not ruling out the necessity to remove the yield cap immediately.

Only a few doves remain, and they are betting on their survival.

Trend inflation is still below 2%. However, if that level is met with certainty, then it will not be surprising for BOJ to adjust monetary policy,” Asahi Noguchi said this month. He’s a prominent advocate of aggressive easing.

It is becoming more likely that wages, which have been languishing for so long, will rise again. This would be a condition of any policy shift.

Japan’s umbrella labor union, the Japan Labour Union, has demanded a 5% increase in pay for next year’s spring wage negotiations. This, along with tightening employment markets and repeated government calls to raise wages, are pushing firms to improve salaries.

One source claimed that the BOJ will not pull the trigger on YCC yet but it would like to be prepared in the event of conditions.

The board discussed the effects of extended easing on the economy and the implications of an exit from ultra low rates at October’s policy meeting. This was a departure from the usual emphasis it places on economic risk.

Kuroda acknowledged the possibility of some short-term changes, but he also left space for future adjustments by creating a framework for the BOJ’s exit from its ultra-loose policy last month.

BOJ personnel are currently producing research about topics that can be used to guide thinking regarding future monetary policy movements, much like they did prior to the 2016 shift from YCC.

A similar note was published Nov. 30 and stated that prices are rising in industries such as the drug store industry, which once prospered from deflation.

Takeo Hoshi from the University of Tokyo, who was speaking at a BOJ workshop last month, stated that structural changes in Japan’s labor market may cause average wages to rise more than previously.

He told Reuters that the BOJ should be concerned about inflation acceleration exceedingly anticipated. The BOJ could also abandon its yield cap by next year.

Hoshi is one of a number academics that have frequent interactions with BOJ policymakers.

Kuroda’s time at the helm is over. The task of a smooth exit will fall to the new governor, and their two deputy, who will each be appointed by Fumio Kirishida, Prime Minister, in April and March respectively.

Kishida is not like Abe in 2013 when he hand-picked Kuroda as a governor to help pull Japan out from deflation using a shock-and–awe approach.

Kishida’s unstable political position makes it difficult for the selection process. His approval rating is at an all-time low after three scandals made him resign from his cabinet.

According to officials and politicians close to the government, Kishida could instead pick a pair of safe hands to guide Japan towards exit.

With deep expertise as career central bankers and deputy governor Masayoshi Maamiya, former deputy Hiroshi Nagaso are top candidates to succeed Kuroda.

Amamiya stated in July that while he vowed to keep rates low the BOJ should “always” think of ways to end ultra-loose policies.

Nakaso warned about the dangers associated with maintaining crisis mode stimulus for too many years and published his plan of exit in a May book.

There are many caveats to the exit route. Japan could be hit hard by a worse than expected U.S. recession, or even a massive slump in China’s economic growth. This would negate any chance for a withdrawal of stimulus funds.

The government could resist any move that would increase Japan’s debt servicing cost, as it needs to finance a planned increase in defense spending.

Analysts say that even if the BOJ moved, it would still be difficult to communicate an exit strategy. Even slight hints at a tweak in YCC might cause a bond sale-off and scare investors who are used to hearing about the bank’s interventions.

This was evident when, in March, the BOJ was required to buy unlimited bonds to protect its yield limit from attacks by speculative markets.

Kazuo Momma, an ex-BOJ executive who has experience in drafting monetary policies, stated that “the moment markets expect a policy adjustment, the BOJ may find it difficult to control the 10-year Yield.”

“That is why the BOJ will not provide advance signals or remove the yield cap within a single stage.

Japan spends one-third annually on debt issuance, and more than 20 trillion yen ($147.45 million) per year to fund public debt twice its size. This makes any increase in long-term borrowing costs disastrous.

Many policymakers believe Japan’s September market crash in Britain has lessons to learn from it. Liz Truss, then the premier of Britain, had proposed unfunded tax cuts. This led to bond selling that forced Truss out.

Yasushi Kinoshita (a former finance ministry bureaucrat who was considered a candidate for deputy BOJ governor) stated, “Everyone knows the BOJ must eventually go for the exit.”

There is also agreement that the BOJ should move slowly and cautiously. Market turmoil could result if interest rate control fails to go smoothly.


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