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Kuroda Inches Toward October Easing But BOJ Holds Fire for Now

Toru Fujioka and Sumio Ito

(Bloomberg) -- The Bank of Japan reluctantly tiptoed closer toward ramping up its stimulus Thursday, setting up a Halloween policy meeting as a possible moment for action, while stopping short of guaranteeing it would pull the trigger.

Following rate cuts by the Federal Reserve and the European Central Bank to prop up growth amid a global slowdown, the BOJ once again stood pat on policy on Thursday, taking advantage of a favorable upturn in markets to put off further measures to support Japan’s economy and prices.

But easing action now looks more likely in October after the BOJ also ordered a review next month to see if developments overseas have the potential to kill off momentum in Japanese prices.

“If it’s a question of whether I’m more inclined to go ahead with easing than at the last meeting, yes, that’s right,” Haruhiko Kuroda said at a press conference following the decision. Denying that he lacked firepower, he said the BOJ arguably had more ammunition than the ECB, given Japan’s policy rate of -0.1% compared with -0.5% in the eurozone.

A BOJ move at the Oct. 30-31 meeting would fit in with long-held expectations among some economists that the central bank would work in tandem with the government to keep the economy on track after a potentially harmful sales tax hike that comes into effect at the beginning of the month. A previous increase in the tax in 2014 triggered a contraction of more than 7% in the following quarter.

The tax increase is just one of the challenges facing the world’s third-biggest economy. Inflation stood at 0.6% in July, far from the BOJ’s 2% target, and exports have declined every month this year.

Kuroda said a government working together with the central bank could create extra synergies, but he downplayed the impact of the tax hike this time and tried to keep the focus on the risks to Japan stemming from the global economy. He said the downside risks abroad, including protectionist trade moves, were increasing and that’s what warranted the review. While he still expected the economy to pick up toward the end of this year, he acknowledged there was no sign yet of improvement in the global economy.

On the international front, there’s a lot that could change between now and the BOJ’s next policy review. The U.S. and China are set to resume high-level trade talks and investors are on edge over any potential retaliatory action after Saudi Arabia said drone attacks that took out about 5% of global oil production were sponsored by Iran.

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With such uncertainty, some economists say it’s hard to predict which way the BOJ will turn.

“It’s too early to say further easing is a done deal at the October meeting. The BOJ is just saying that it will review the economy and inflation so it’s not a commitment to take action,” said Chotaro Morita, chief rates strategist at SMBC Nikko Securities in Tokyo. The BOJ had to be seen doing something after the Fed cut rates, he added.

Even before Thursday’s call for a review, an increasing number of economists -- 83% in the latest Bloomberg survey -- saw the next policy step as likely to be the addition of further stimulus. In 2016, the BOJ’s call for a comprehensive assessment of policy preceded a large-scale revamping of its easing program to focus on short- and long-term interest rates.

“The BOJ will review its policy with more easing in mind,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “As Kuroda has said, a deeper negative rate is an option, but that will certainly draw criticism from financial institutions.”

At a news conference after Kuroda spoke, the head of Japan’s main bank lobby welcomed the stand-pat decision, reiterating the lobby’s view that the BOJ should refrain from lowering its negative rate. Makoto Takashima, chairman of the Japanese Bankers Association said any deepening of negative rates would further dent loan profitability for banks and could reduce their incentive to lend.

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Squeezing bank profits is one of the building side effects of the BOJ’s massive easing program that makes Kuroda reluctant to step harder on the gas pedal.

The BOJ’s decision and Kuroda’s comments strengthened the view among some economists that Kuroda was still playing for time in the hope that he might avoid taking painful action.

“Kuroda is indicating he’s leaning toward additional easing without binding his hands. I don’t think the chances of easing are that high next month unless the yen hits 100 by then,” said Kyohei Morita, chief Japan economist at Credit Agricole Securities Asia.

A weakening in the yen in recent weeks likely helped give Kuroda room to hold off acting for at least a while longer. Japan’s currency touched 104.46 against the dollar last month, the strongest level since November 2016. Economists generally see a move to 100 as a trigger for the central bank to cut its negative rate.

While a majority of economists correctly forecast the central bank’s steady stance today, some predicted a move lower. The yen strengthened after the BOJ’s decision, but then reversed course and was trading at 108.08 at 4:40 p.m. after Kuroda spoke.

What Bloomberg’s Economists Say

“The Bank of Japan is clearly growing more uneasy about the inflation outlook. We’re not convinced, though, that it’s about to pull the trigger on further stimulus. It set up its next policy board meeting as a critical event -- saying it will “reexamine” economic and price developments. This will be after the sales tax goes up on Oct. 1.”

Yuki Masujima, economist

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Another headache for BOJ policy has also eased for now. Japan’s 10-year government bond yield is back trading within BOJ’s target range after touching a three-year low of -0.295% earlier this month, a level some BOJ officials said was close to requiring action, according to people familiar with the matter.

Kuroda said during his news conference that the BOJ wouldn’t allow yields to fall for a prolonged period, and that it was desirable for the yield curve to steepen a bit. Long-term rates that fall too much may squeeze profit margins for pension funds and insurers, as well as affect consumer sentiment, he said.

“Under the current yield curve control, we will make necessary adjustments to JGB purchases so that the yield curve will be appropriate,” Kuroda said.

(Recasts with Governor Kuroda’s comments.)

--With assistance from Yoshiaki Nohara, Emi Urabe, Russell Ward, Keiko Ujikane, Junko Yoshihara, Go Onomitsu, Sophie Jackman and Brett Miller.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Sumio Ito in Tokyo at sito58@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson, Henry Hoenig

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