Bank of Japan removes timeframe for price goal, keeps policy steady

Asian Stock Markets

Japan’s central bank kept policy steady on Friday but ditched a timeframe it had set for hitting an inflation target, in a surprise move analysts say is aimed at keeping market expectations for more stimulus in check. 

The Bank of Japan at its policy meeting maintained an optimistic view of the economy but flagged downside risks to the consumer price outlook, underscoring the challenge of eradicating the public’s sticky deflationary mindset.

Some economists say the omission of an inflation target timeframe is designed to create a better framework for the central bank to communicate with markets.

As widely expected, the BOJ maintained a pledge to guide short-term interest rates at minus 0.1 percent and the 10-year bond yield around zero percent by a 8-1 vote.

In a quarterly review of its projections, the BOJ left its inflation forecast for next fiscal year unchanged from three months ago, at 1.8 percent.

It also projected inflation of 1.8 percent for the following fiscal year, underscoring its view a strengthening recovery will sustain price growth toward its 2 percent target.

However, the BOJ removed a phrase on the timing for achieving its price target in an acknowledgement that meeting the goal was taking more time than expected.

The central bank had been forced to push back the timeframe six times due to subdued inflation. Analysts have criticized as too optimistic the bank’s latest projection made in January that the price goal will be achieved during fiscal 2019.

The BOJ’s approach to policy communication came into the spotlight late last year, after a series of what the market interpreted as conflicting messages by its central bankers that rattled financial markets.

In the quarterly report on Friday, the BOJ maintained its view the economy was expanding moderately and said its inflation forecasts for the coming years were roughly unchanged from three months ago.

But the central bank added that risks to the inflation outlook were skewed to the downside, as it could take longer than expected for companies to raise wages and translate higher costs to households.

Financial markets are on the look-out for what BOJ Governor Haruhiko Kuroda says in his post-meeting briefing on the effect rising U.S. Treasury yields could have on the BOJ’s policy capping Japanese long-term rates around zero percent.

The meeting marks the fifth anniversary since Kuroda, who was reappointed for another five-year term, deployed a massive asset-buying program to break Japan out of deflation and accelerate inflation to his 2 percent goal.

The BOJ’s huge bond purchases have kept Japanese bond yields stable, even as benchmark 10-year U.S. Treasury yields climbed above 3 percent for the first time in four years.

That has caused U.S.-Japan yield differentials to widen in the dollar’s favor, leaving the yen lower in a welcome boost to Japan’s export-reliant economy.

Japanese policymakers generally favor a weak yen as it gives the country’s exports a competitive advantage overseas. It also pushes up import costs and works to accelerate inflation.

BOJ's next challenge - unwinding Kuroda's legacy stimulus

For Bank of Japan Governor Haruhiko Kuroda, Sunday’s general election has brought into focus the challenge of unwinding a massive stimulus programme and yield curve control policy, while not hurting a budding but still fragile economy, the world’s third-largest.

With inflation far below a 2 percent target, the BOJ rules out any near-term exit from Kuroda’s legacy ultra-easy policy. 

But there’s growing alarm within the central bank about how long it can keep the money spigot open, given the rising costs and diminishing returns, people familiar with BOJ thinking say. 

Most of the BOJ’s nine board members and bureaucrats involved in drafting monetary policy feel the next step - though some way off - would be to roll back Kuroda’s radical monetary experiment, with the economy in recovery-mode, they say. 

The political tide is shifting in favour of at least having such a debate. 

Several ruling Liberal Democratic Party (LDP) heavyweights have warned of the rising cost of prolonged monetary easing. Opposition parties, including the new Party of Hope led by popular Tokyo Governor Yuriko Koike, want a departure from over-reliance on monetary policy.

BOJ bureaucrats are drafting a plan. The trick is to retreat from crisis-mode stimulus without giving the impression the bank is embarking on outright monetary tightening. 

Already, the BOJ is proceeding with the first stage of the plan - by whittling down its vast bond purchases to an annual pace of around 50 trillion yen ($443 billion), below a loose pledge to keep it at around 80 trillion yen. 

The next step would be to allow long-term interest rates, which the BOJ has capped at around zero, to rise, more reflecting improvements in the economy, the sources say. The bank could raise the bond yield target or shift it to the shorter end of the curve even before inflation hits 2 percent, as it can maintain easy monetary conditions with its strong balance sheet.

BOJ's Kuroda says won't raise bond yield targets now

Bank of Japan Governor Haruhiko Kuroda said on Friday he does not expect the central bank to raise its bond yield targets now, and will look at underlying trend inflation in guiding monetary policy.

"If inflation in Japan accelerates sharply, at some point the BOJ may debate adjusting its interest-rate targets," Kuroda said at a Reuters Newsmaker event.

"When deciding on monetary policy, we must look at the underlying trend of inflation ... We won't change monetary policy just because oil price rises push up inflation," he said.