Does the Bank of Japan (BOJ) need to re-evaluate their bond purchases programme to include other risky assets?

Thomson Reuters reported on December 02, 2013 that the central bank policymakers, led by Bank of Japan (BOJ) governor, Mr. Haruhiko Kuroda are currently evaluating potential scenarios including not limiting itself to only the purchase of Japanese Government Bonds (JGBs), mortgage-backed securities, (MBS), and other debt instruments, but should also factored in the possibility of purchasing more risky assets, such as index-linked funds, or other assets that provide greater returns relative to JGBs. The current total purchases of JGBs amount to an average of USD 70.00 billion a month.

The shift in the policy debates within the BOJ inner circles comes at a time when past BOJ monetary stimulus programmes, along with the various government fiscal measures that were introduced since Prime Minister Shinzo Abe, have not produced much tangible differences to the overall Japanese economy, particularly in the area of boosting up household spending levels, accelerating the inflation levels. Based on the October/November 2013 data, the inflation level as measured by the core consumer price inflation level is currently standing at 0.90 percent, and is still way off from the 2.00 inflation target goal to be achieved sometime during the second half of 2015. There were some negative views being expressed by many economists, and market observers, citing that inflation levels are still relatively subdued, and Governor Kuroda’s 2.00 percent inflation objective might be an overly ambitious target to be set. The policy debate within the BOJ comes at a time when it is slowly approaching the first year on Prime Minister Abe’s administration, and there is an urgency coming from the Japanese people/businesses in seeing that the economy grows again, and not returned to the past deflationary spiral.

The BOJ’s monetary policy actions have produced some meaningful results including weakening the Japanese Yen currency, and creating the conditions needed for Japanese manufacturers to expand overseas, and revive some of the export growth. However, when it comes to attempts to help increase the inflation levels, and economic growth, it has been quite a slow progress towards the original 2.00 percent inflation target. Till date, BOJ governor Kuroda has not officially backed down of his inflation target levels, but some of his colleagues have expressed their reservations over Governor Kuroda’s policy stance.

The recent economic figures since Prime Minister Abe took office in early January 2013 are relatively mixed. Going forward, Prime Minister Abe has received approval from the Japanese Parliament to go ahead with the plan to increase the present consumption tax level of 5.00 percent to 8.00 percent by April 01, 2014. The BOJ’s inflation forecast of 2.00 percent to be attained by the second half of 2015 has also factored some of the expected price increases whereby it is expected to have a direct impact of increasing the inflation levels. However, the tradeoff could result in a fall in household, and business spending levels following the introduction of the consumption tax hikes next year. There is still an element of time uncertainty, as spending levels fluctuate along with economic growth expectations coming from households, and businesses.

According to the Dec 03 Reuters news article, it reported that four of the nine BOJ’s board members, economists by training, have either expressed their dissenting views on the policy votes, or have publicly casting doubt on the BOJ’s forecasts. However, Governor Kuroda could still rely on the rest of the remaining five votes, with two deputy governors, and two former business executives, backing his policies wholeheartedly. The pessimist camp has also dissented among themselves, with some citing the over-ambitious nature of Governor Kuroda’s inflation targets. Others within the same camp have appeared to show more inclination towards the stance of easing the interest rates further if the 2.00 percent inflation target is still at a distant.

Looking on to 2014, economists will be keenly waiting to assess both the short-term and long-term impacts of the post April 01 implementation of the consumption tax hikes, and the updated growth and price forecasts coming from the BOJ. It is also expected that by July 2014, if the consumption tax hike result in a destabilising effect of slowing down the Japanese economy further, additional stimulus measures could be on the table. Most economists are not ruling out that policymakers from the BOJ will resort to using unconventional measures to boost inflation growth, and bolster the economic growth further. Japanese households and business may pre-empt the introduction of the April 01 consumption tax hike by timing their expenditure decisions, and this could pose a challenge for the BOJ as it needs to make the appropriate decisions through the undertaking of the various monetary policy tools available in creating economic growth in the country.

In summary, the Bank of Japan does have an uphill task in terms of policy co-ordination, and possible shifts in the current 2.00 percent inflation level target. Governor Kuroda is also trying to avoid the past mistakes of his predecessor, Mr. Masaaki Shirakawa, who was often viewed as not able to appropriately time policy intervention based on market expectations, and fiscal measures laid down by the Japanese government. I believe that one of the challenges that could face BOJ’s monetary policy decisions is the unknown impact coming from the April 01 consumption tax hike. Governor Kuroda and his fellow BOJ colleagues have to watch closely the various monetary stimulus measures that are appropriate, and time it in a way that will take the economy into a more sustainable path of growth going forward.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc