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Last updated: April 4, 2013 2:53 am
All eyes will be on Haruhiko Kuroda on Thursday afternoon, as the new governor of the Bank of Japan wraps up his first monetary policy board meeting.
To say that expectations are high would be an understatement. Since Mr Kuroda emerged as a strong candidate to succeed Masaaki Shirakawa at the helm of Japan’s central bank, he has vowed to do “whatever it takes” to achieve the 2 per cent inflation target set for the bank by Prime Minister Shinzo Abe’s new government, overturning more than a decade of mild but corrosive deflation.
Such talk has sent the yen sharply lower against the US dollar and stocks to a four-and-a-half year high.
Now, just two weeks into the job , comes the time for action. In contrast to policy meetings on Thursday at the European Central Bank and Bank of England, which look set to deliver nothing new, the first official get-together of the new BoJ board will be “momentous”, said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe.
The meeting will reveal “whether the new governor has been able to match his recent rhetoric with the substantive action expected of him”, he said.
At a minimum, markets expect an acceleration of the pace and scale of the bank’s asset purchases. At present, the BoJ is committed to buying about a total of Y4.2tn in government bonds each month between April and December.
Investors expect an increase in the pace of buying, perhaps to Y6tn a month, with more of an emphasis on longer-term bond purchases.
More significantly, many are counting on the BoJ announcing a merger of the two programmes under which it currently buys bonds. One, the asset-purchasing programme (APP), was set up under former governor Masaaki Shirakawa in October 2010 with the aim of keeping rates for borrowers low. It buys bonds of up to three years to maturity.
The other, known as “rinban”, is a longstanding programme designed to keep interest rates stable, and targets durations all along the yield curve to 30 years.
By combining the two, the new governor could make the easing effort “a lot simpler”, says Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch in Tokyo. A merged APP and rinban “would make it easier for the market to understand at what kind of pace the bank’s JGB holdings are growing”.
Merging the two would also mean that the BoJ abandons its so-called “banknote” rule, under which its holdings of JGBs cannot exceed the value of bank notes in circulation.
In his testimony to parliament, Mr Kuroda observed that such “self-imposed ceilings” are not seen at other central banks.
While some are hoping for an APP-rinban merger to be effective as of Thursday, others expect Mr Kuroda to announce a plan to combine them, with the details to be ironed out by the time of the BoJ’s next policy meeting on April 26.
Otherwise, expectations are more mixed. Some are counting on a pledge from Mr Kuroda to buy more exchange traded funds, real estate investment trusts, corporate bonds and commercial paper, in keeping with his pledge to parliament this week to “pursue the further diversification of assets”.
Before his official nomination for governor, Mr Kuroda had said that there were “hundreds of trillions” of assets the BoJ could potentially buy.
Others are expecting changes to the BoJ’s language, indicating a firmer commitment to continue easing until the 2 per cent target is in sight. At the moment, that pledge comes with the qualifier, “as long as the Bank judges it appropriate”.
Meanwhile, all will be watching voting patterns closely. Any big division on the nine-person board – a proposal backed by seven votes to two, for example, or even 6 to 3 – may indicate that Mr Kuroda has battles ahead to win round the six board members who until last month were mostly loyal to Mr Shirakawa.
Amid such intense interest among investors in “Abenomics”, even tiny triggers could prove decisive in shifting sentiment, say analysts.
“What is important for Mr Kuroda is not to lose this momentum in the stock market and the FX market and in the Japanese economy at large,” says Nobuyuki Nakahara, a former BoJ board member.
“If he stumbles in the initial one or two meetings, that would be tragic.”
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