September 1, 2016 5:30 am JST
BOJ Watch

What form would Kuroda's re-anchoring take?

MAKOTO NAKANISHI, Nikkei staff writer

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda touted his plans for "re-anchoring" inflation expectations in a speech in Jackson Hole, Wyoming. But he did not tip his hand as to what that would mean for the BOJ's next move. 

And now market players are parsing his Saturday speech to find clues to what the BOJ might conclude in the comprehensive assessment of its ultraloose monetary policy when it meets in late September.

In the first half of the speech, Kuroda cited a view held by some experts that inflation outlooks are swayed by past economic indicators and are thus formed in a "backward-looking" manner. The year-on-year changes in the consumer price index frequently fell into negative territory during the 1990s, which weighed down subsequent inflation expectations and undermined the effects of anti-deflationary measures, Kuroda explained.

The BOJ's unprecedented monetary easing policy was meant to break this vicious cycle by setting a specific timetable. The bank has promised to achieve 2% inflation in two years, specifically to change the consumer mindset. Yet CPI growth readings remain in subzero territory amid the double whammy of the strong yen and weak oil prices. The BOJ has been forced to extend its time frame, chilling price outlooks in the process.

Against that backdrop, the BOJ chief could have mentioned the backward-looking nature of inflation expectations as a signal that the bank will not necessarily stick to a short-term strategy. The BOJ is expected to remove the two-year deadline from its 2% inflation target in the next meeting's review.

So how would easing policies change under this route? Kuroda did not mention Japanese government bond purchases in his speech, but the BOJ may become more flexible with its buying spree. The central bank currently buys JGBs at an 80 trillion yen ($774 billion) fixed annual pace, but that purchasing is expected to hit the ceiling of available bonds in a year or two.

Some market watchers say the BOJ may adopt a range between 70 trillion yen and 90 trillion yen, which would give the appearance of expanded easing. There is even buzz the BOJ may decide to purchase fiscal investment and loan program agency bonds or other instruments currently outside its buying scope.

At the same time, the BOJ may surprise the market yet again. Kuroda played up the benefits of the BOJ's negative rate policy during the second half of his speech. The minus rate policy benefited "a wide range of borrowers" and there is still margin to cut the interest rate further into negative territory, he insisted. Earnings at financial institutions may be suffering under the negative rate, but that does not seem to rule out another surprise. 

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