Bloomberg/Tokyo
Governor Haruhiko Kuroda says the Bank of Japan may need to get creative in any further monetary stimulus.
Among options analysts highlight: regional-government bonds, a type of security that could aid public support.
Kuroda, speaking in an interview with Bloomberg Television on Friday in Davos, Switzerland, said “there are many options and I don’t think it’s constructive to say this or that could be done.” He reiterated that if inflation expectations are “seriously” affected by disinflation, policy can be changed.
The bulk of the central bank’s record asset buying is currently concentrated in debt issued by the national government, yields on which have been pulled down toward zero, even on 10-year notes. BoJ officials had different views on how much capacity there was to expand the purchases, people familiar with the discussions said last month.
“This could be a reflection of his thoughts that bond purchases are coming close to their limit because it’s buying almost all of the newly issued bonds each month,” Takahiro Sekido, a strategist at Bank of Tokyo-Mitsubishi UFJ who used to work at the BoJ, said after Kuroda’s remarks. “Options he could take include derivatives and regional bonds. By buying regional bonds, the BoJ could say it’s supporting the government’s efforts to revitalise regional economies.”
Prime Minister Shinzo Abe’s ruling Liberal Democratic Party, facing local elections in April, has sought to spread the benefits of the Abenomics programme to regions that have borne the brunt of Japan’s population decline and aging. The initiatives so far have brought the biggest positive impact to exporters, whose profits have climbed with a weakening yen, and to investors in stocks, which have soared.
Exports climbed 12.9% in December from a year before, a government report showed on Monday, with shipments to the US jumping almost 24%. Kuroda said on Friday that exports should accelerate in coming months. Japan still posted a record annual trade gap for 2014, thanks to purchases of energy and an increase in imports before a sales-tax hike in April.
Lawmakers last year began questioning the wisdom of driving down the yen and making the cost of living more expensive for households, amid continued stagnation in wages.
Spreading the BoJ’s asset purchases to securities issued by prefectures and municipalities would raise the potential for added backing for the central bank’s efforts to spur inflation toward 2%.
The amount of regional bonds outstanding may reach ¥200tn ($1.7tn) at the end March, according to a finance ministry report released in October.
The BoJ could buy shares from banks directly, or equity in commodity funds and real estate funds, according to Izumi Devalier, an HSBC Holdings economist in Hong Kong. Zaito bonds, used to raise money for projects at state-run companies, could be something to look at, said Yuji Shimanaka, an economist at Mitsubishi UFJ Morgan Stanley Securities Co While Kuroda said he was open to considering derivatives in March 2013, they may be too complicated, according to Mari Iwashita, a market economist at SMBC Friend Securities Co. The purchase is too hard to understand for people outside the market and that complexity was a source of US financial crisis in 2008, she said.
Buying foreign bonds, an idea that’s come up from time to time stretching back to the BoJ’s first quantitative-easing experiment at least early last decade, are probably less likely.
Kuroda said in March 2013 buying foreign bonds would be like currency intervention and that foreign exchange rates should be determined by the market. Kuroda’s remarks followed repeated a proposal from former deputy governor Kazumasa Iwata for a ¥50tn fund to buy the bonds from overseas.
Among other central banks, the US Federal Reserve bought mortgage securities as a significant part of its asset purchases. The European Central Bank, which unveiled its quantitative easing programme on Thursday, will buy government bonds, securities issued by public agencies and asset-backed securities, according to a euro-area official last week.
The ECB action would be “beneficial to the world economy including the Japanese economy,” Kuroda said in the interview.
“We very much welcome this action.” The BoJ’s record purchases of Japanese government bonds have contributed to the biggest price swings in this market in a year and a half.
The 10-year yield was ended at 0.225% on Monday, after touching a record low of 0.195% last week.
A majority of economists surveyed by Bloomberg News expect the BoJ will step up easing by October. Much of the difference in the outlook between the central bank and private economists, along with the International Monetary Fund, may hinge on the impact of oil on the economy. Kuroda in the interview repeated his confidence that over the long run, the slump in oil would strengthen economic growth and push up consumer prices.
“In the short run, oil price declines tend to reduce inflation all over the world,” Kuroda said. In the medium to long run, lower oil prices could raise the “real growth rate, and that would eventually raise the inflation rate gradually.” If oil falls by 50% from a peak in June last year, it would boost nominal gross domestic product by 1.2 percentage points, or ¥5.6tn, according to a government estimate cited by Kyodo News.
Japan imports almost all of the oil it consumes and the price has declined about 60% since June.
“Concerns among households and companies will be alleviated,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “Together with the fading impact of April’s sales tax hike, spending by consumers and business will pick up and Japan’s economy will return to a gradual recovery trend.”
Kuroda: Confident of achieving 2% inflation target.
