BoJ: Kuroda’s ground rules for policy discussion – AmpGFX

Greg Gibbs, Director Amplifying Global FX Capital, notes that the speech by BoJ Governor Kuroda indicated that the Bank will stick to a 2% inflation objective and aim to achieve it at the “earliest possible time”.

Key Quotes 

“And also assured us that the “level” of monetary policy accommodation will not be reduced.  However, the speech suggested that the Bank would consider changing the mix of policy (perhaps lowering to NIRP further while reducing the amount or maturity profile of asset purchases). Kuroda continued to argue that there was ample scope to further ease policy across all dimensions of quality, quantity and negative interest rates.  However, the issue is not about limits to policy but the costs and benefits of these measures. 

Kuroda admits there are costs of maintaining the current policy stance and extending it further and this must be weighed against the benefits.  Nevertheless, he strongly suggested that the benefits at least outweigh the costs of existing policy.  The speech highlighted costs associated with the flatness of the yield curve suggesting the bank would look at ways of mitigating these costs.

The speech did not suggest that the BoJ needs to significantly increase overall policy easing measures. Kuroda sees the economy close to full employment and the adaptive nature of Japan’s inflation expectations suggests that they should rise as the oil price effect on inflation dissipates.  As such there is no sense of urgency to further boost easing, only to maintain a strong commitment to the 2% inflation target at the earliest possible time.

Noticeably absent was any reference the JPY exchange rate and the dampening impact its strength has had on inflation or the effectiveness of monetary policy.  This suggests that the topic of intervention is too politically sensitive and any policy of buying foreign bonds is off-limits.  Furthermore, Kuroda dismissed the possibility of helicopter money policy as essentially illegal and undesirable.

The speech provides little impetus to weaken the JPY.  However, it does leave the door open for a modest further reduction in interest rates, which combined with a somewhat higher outlook for US rates and a more balanced positioning after the steep rise in JPY this year, may help stabilize the JPY exchange rate and weaken it modestly.  The Japanese yield curve has already steepened over the last month or so since the 29 July policy meeting, and this speech gives some additional support for this trend.”