I guess there are a couple of different ways you can look at Kuroda’s reappointment as Governor of the most profligate DM central bank in a world where DM central bank profligacy is the rule rather than the exception.
On one hand, it guarantees continuity of policy and thereby ensures that to the extent BoJ policy does become a source of market shocks, it won’t be due to a change of leadership. In the same vein, the nomination of Masazumi Wakatabe for deputy governor pretty clear suggests that the reflationist bent isn’t going anywhere anytime soon.
“Given his statements, it seems quite likely that Wakatabe will propose additional easing—likely in the form of QE—in the not-too-distant future,” Citi wrote earlier this month, although they did note that’s not likely to gain much in the way of traction.
Indeed, the consensus here seems to be that continuity is something entirely different from designs on plunging further into the abyss on easing and as everyone and their brother has variously noted over the past year, the BoJ has been in “stealth” tightening mode for sometime – although that characterization is of course debatable.
As Credit Suisse wrote in a note out this week, the nomination of Wakatabe probably doesn’t signal what a lot of people seem to be suggesting it signals in terms of a push towards more easing (although at this point, it’s not entirely clear how it’s conceivable to do much more on the easing front). Indeed, as CS notes, Abe could have actually pointed to the yen and to still below-target inflation on the way to insisting on still more accommodation. To wit:
The Abe administration could conceivably have expressed dissatisfaction with the BoJ’s approach and called for the USDJPY to be driven up to 120 or higher with a view to achieving +2% price and wage inflation as quickly as possible, but it sensibly opted not to do so for fear of incurring the wrath of both the Japanese public and the international community.
Some may therefore wonder why the government nominated a so-called “reflationist”— Waseda University Professor Masazumi Wakatabe—for one of the two deputy governor positions.
But again, Credit Suisse thinks this doesn’t presage anything too dramatic. “Doubts would be allayed given that Wakatabe does not appear to favor any drastic changes to the BoJ’s monetary policy framework, his stated preference for tapering of quantitative easing to proceed more gradually needs to be viewed in the context of maintaining policy continuity, and his academic background is in the field of economic history.”
In other words, his presence on its own isn’t likely to mean more aggressive easing.
On a humorous note, it’s good that “his academic background is in the field of economic history” because Kuroda’s BoJ is damn sure going to go down in “history” – the only question is how kind (or not) “history” is going to be.
Additionally, consider the following excerpts from a Reuters piece out earlier this week:
The reappointment of Bank of Japan Governor Haruhiko Kuroda for another five-year term means the central bank will continue to gradually edge away from crisis-mode stimulus, former BOJ board member Takahide Kiuchi said.
Premier Shinzo Abe’s decision to reappoint Kuroda, whose massive easing efforts failed to accelerate inflation to his 2 percent target since becoming governor in 2013, is a sign the government is no longer insisting that the BOJ meet its price goal quickly, he said.
Since abandoning a policy targeting the pace of money printing in 2016, the BOJ is already whittling down its sweeping stimulus program by slowing its bond purchases, Kiuchi said.
“A de-facto normalization of monetary policy is already taking place and will continue under a reappointed Kuroda,” said Kiuchi, who served at the BOJ’s nine-member board until July.
So maybe, in the eyes of the market (which is all that matters), Wakatabe will serve as a kind of check on things. It’s a pretty perverse dynamic when you think about it – in the event Kuroda starts to sound some semblance of sane in terms of normalizing policy, the voice of “reason” (where “reason” here actually means not normalizing) will be someone who is even more insane than Kuroda when it comes to accommodation.
Anyway, as the market ponders what’s next, the entire decision calculus for the BoJ is complicated by incessant dollar weakness. Any nod to normalization (or, as we learned in early January when the FX market freaked out after the BoJ trimmed JGB purchases in the 10-25Y zone, even a perceived nod to normalization), would catalyze still more yen strength, a decidedly undesirable scenario given the BoJ is still well behind on hitting its inflation target.
Well in light of that, the following out Wednesday evening from Reuters is interesting:
The Bank of Japan should consider buying foreign bonds as part of efforts to reflate the economy during Governor Haruhiko Kuroda’s second term at the central bank helm, an economic adviser to Prime Minister Shinzo Abe said.
The BOJ is prohibited by law from buying foreign bonds for the explicit purpose of influencing currency rates, as exchange rate policy falls under the jurisdiction of the finance ministry.
But some academics have proposed that the BOJ could buy them if doing so was aimed at pump-priming the economy, an idea the central bank has dismissed so far because it would be hard to convince Tokyo’s G20 counterparts that Japan wasn’t trying to weaken the yen.
“Under the BOJ law, the finance ministry holds jurisdiction over currency policy. But I hope Kuroda would consider having the BOJ buy foreign bonds,” Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters in an interview on Thursday.
As you’re probably aware, Japanese officials (think: Asakawa and Aso) have been out this month expressing concern (if not yet “the courage to act” to employ a fun central banker joke) with regard to yen appreciation after USDJPY dove below last year’s lows.
So the idea for the BoJ here would be to buy foreign bonds from banks on the excuse that doing so would encourage those banks to lend and then when everyone in the G20 gets pissed, simply say that the move has nothing to with the yen and everything to do with running out of domestic assets to buy.
The amusing thing about that is that while it would be seen for what it is (a thinly-veiled move by the BoJ to manipulate the currency), there would be some truth to the cover story.
After all, the ETF buying program was, last I checked, literally breaking the stock market. As Citi wrote back in August, “if the BoJ continues ETF purchases of the current amount using the same methodology, its holdings of ETFs will grow to around ¥24trn at end-March 2018 and about ¥31trn at end-March 2019 which could cause the number shares circulating on the market to almost completely dry up for some stocks.”
As for the JGB market, everyone knows what’s going on there. Kuroda has simply commandeered it to the detriment of liquidity which sets the stage for God only knows what when the bank starts to pull back (exiting a market that you’ve sucked all the liquidity out of is a decidedly dicey proposition, because who knows how it will function without you).
Meanwhile, on the corporate bond buying front, they’re back to buying negative-yielding debt as noted on Wednesday by BBG’s Lisa Abramowicz:
Lest anyone think we're really moving into a steady, global tightening cycle, check out the Bank of Japan, which bought corporate bonds from financial firms this week at negative yields for the first time in 11 months. pic.twitter.com/teGaiC7KM0
— Lisa Abramowicz (@lisaabramowicz1) February 21, 2018
So getting back to the Reuters story, the BoJ wouldn’t really be “lying” (per se) if they argued that they are forced to buy foreign bonds because they’ve simply “run out of domestic assets to buy.”
Whatever the case, this just underscores how absurd this is all becoming.
Additionally, it would appear to add yet another layer to an already complicated debate about foreign demand for U.S. fixed income.