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May 27, 2013 10:26 am
Bank of Japan board members have pointed to “contradictions” in the central bank’s aggressive easing policy, according to minutes of an April meeting.
According to the minutes of the April 26 policy meeting, released on Monday, a “few” board members said the BoJ’s original stance “might initially have been perceived by market participants as contradictory”, causing “fluctuations in financial markets”.
After Haruhiko Kuroda’s first meeting as BoJ governor on April 4, the bank said it would lower interest rates across the yield curve, thus pushing investors into riskier assets such as loans and stocks. At the same time, it said it aimed to achieve a 2 per cent rate of inflation at the earliest possible opportunity – implying upward pressure on rates.
Since then, prices of bonds have slumped amid record levels of volatility, as traders have struggled to adjust portfolios in light of what some called the “Kuroda shock”.
Kazuhiko Sano, chief strategist at Tokai Tokyo Financial Holdings, said investors are “very confused”, adding that “many are reluctant to buy bonds right now”.
The BoJ plans to hold a meeting on Wednesday with traders of Japanese government bonds to discuss ways to fine-tune its bond-buying operations.
The BoJ’s efforts are part of a sweeping programme of reforms from Prime Minister Shinzo Abe who has vowed to restore the world’s third-largest economy to consistent growth. Mr Kuroda was handpicked by Mr Abe to set a new course for monetary policy, overcoming more than a decade of mild but persistent deflation.
Yet the comments from the BoJ board members revealed in the minutes are a sign of the “tensions” behind the united policy front, said Naka Matsuzawa, chief Japan bond strategist at Nomura.
Mr Matsuzawa said the BoJ was “chasing two rabbits at the same time”, alluding to the bank’s stated desire to lower nominal yields while pursuing a higher target for inflation, which implies a rise in interest rates.
“Eventually, the target is the same, to push up the economy. But en route, they are having contradictory implications for JGBs,” said Mr Matsuzawa.
While it is unclear how many BoJ board members have raised concerns about “contradictions”, Masaaki Kanno, chief economist at JPMorgan and a former BoJ official, said “a few” probably meant two in this instance.
After the April 4 announcement that the BoJ would increase its bond purchases to about Y7tn-8tn each month in an attempt to double Japan’s monetary base within about two years, liquidity within the JGB market has evaporated, sending yields soaring. Banks have raised their long-term prime lending rates to compensate, meaning that monetary conditions have tightened, rather than loosened, under the new governor.
The BoJ says it is alert to investors’ concerns. Last week, after another monetary policy meeting at which it kept its basic policies intact, Mr Kuroda said he would redouble efforts to bring down volatility in the bond market. On Sunday, he spoke out again, seeking to clarify the bank’s thinking by arguing that Japan’s financial system could cope with higher rates once the economy had picked up.
In its latest report on financial stability, published last month, the BoJ said that a “substantial” rise in JGB yields without any improvement in economic activity could weaken banks’ capital ratios, thus “affecting the resilience of the financial system and the real economy”.
Some analysts say the BoJ should make its actions more digestible by shifting to a system of daily purchases of Y300bn-Y400bn, rather than eight operations a month of about Y1tn each.
And instead of giving the market a couple of hours’ notice each time, the BoJ should supply a detailed schedule of its purchases a month in advance, they say, spelling out sizes and target maturities in a similar manner to the US Federal Reserve.
Without better management of the world’s second-biggest bond market, nerves will remain fragile, said Shogo Fujita, chief Japanese bond strategist at Bank of America Merrill Lynch.
“The BoJ has to kill the volatility it has raised. [The governor’s] credibility is at stake, right now.”
Japanese stock markets saw choppy trading on Monday, with the Nikkei 225 stock average dragged down 3.2 per cent by a strengthening yen. Since Thursday morning, when the 10-year government bond yield pushed through 1 per cent, the main equity benchmark has lost 9.5 per cent, bringing Japan close to “correction” territory.
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