Bank of Japan Governor Speaks

The Bank of Japan Governor, Haruhiko Kuroda in a speech today provided further details on the central bank’s monetary policy shift announced  last week. The high levels of skepticism concerning the policy changes stayed the same as the yen found a fresh support level. Kuroda said that “The mechanism of formation of inflation expectations in Japan tends to be heavily influenced by the course of the past inflation rate,” Mr. Kuroda said Monday in a speech in Osaka, adding that this psychology “plays a considerably larger role in Japan than in other countries.”

Kuroda also affirmed that the bank would commit itself to expanding the monetary base until the observed underlying CPI rate exceeds the 2% target and stays above the target in a stable manner. Kuroda denied that there was a change in the inflation target with the bank shifting its focus to actual CPI inflation rather than the inflation outlook. The focus is, therefore, more on a backward-looking stance rather than forward looking and focusing on inflation forecasts.

The Yield Curve control announcement from the Bank of Japan which appears to be a mystery to most market participants, is the new monetary policy arrangement coming from a country that is actively struggling with deflation. Central bank watchers in Europe are currently looking to Japan for warning signs on negative rates as it may provide a roadmap to the future.

The Japanese central bank has appropriately positioned itself for an era of monetary stimulus that expands beyond the very active tenure of Governor Haruhiko Kuroda. On Wednesday the BoJ board let go of what had initially been allectives for Kuroda since he took charge in 2013; his money-expansion strategy at the core of stimulus policy and a two year time frame for achieving 2% inflation. The BoJ is however well positioned for the long haul, and has reduced the sustainability risk concerning the previous massive 80 trillion yen ($791 billion) fixed annual bond-buying target.

It’s a far cry from the fanfare that greeted Kuroda, now 71, in 2013. Japan was so eager for him to take the helm that stocks soared and the yen slid when his predecessor decided to quit weeks early. With less than 19 months to go, he faces the prospect, like Masaaki Shirakawa before him, of failing to reach his inflation goal. No BOJ governor has been tapped for a second five-year term since the 1960s, and die-hard reflationists who had backed Kuroda’s appointment by Prime Minister Shinzo Abe are now shifting against him.

“I think that’s a bad sign,” said Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “This is tightening -- I’m very disappointed.”

Mr. Kuroda hinted at his theory’s demise in a speech last year when he invoked a fairy tale. He said that like Peter Pan, “the moment you doubt whether you can fly, you cease forever to be able to do it.” Kuroda also stated that the bank will continue to monitor forex developments closely and, although there was no move to intervene openly, further verbal intervention will be an option.

The overall market reaction was limited with the dollar unable to gain any traction against the yen as USD/JPY dipped towards the 100.70 support area from 101.00. The Nikkei closed lower by 1.25% as Kuroda’s comments were released.