The Bank of Japan’s equivocation on its inflation target is adding to the shifting global monetary policy picture that has sparked a sovereign debt rout.
The nation’s 10-year yield has climbed almost 10 basis points since BOJ Gov. Haruhiko Kuroda said April 30 that he sees the price goal being reached around the first half of the 2016 fiscal year. When Kuroda introduced his record bond-buying plan in April 2013, he said he expected the goal would be reached in about two years, Bloomberg reported.
The change in tone is an admission of failure that suggests the need for further easing, which is technically difficult and requires a new policy regime, according to Tokai Tokyo Securities Co.
The whispers of unquiet in Japan’s markets coincided with a slump in bonds across the world on prospects that US interest rate increases will kill off the bull-run in sovereign debt that took yields to unprecedented lows. Benchmark Japanese securities headed for their biggest decline in three months on Thursday after Federal Reserve Chair Janet Yellen said on May 6 that yields on Treasury bonds are too low.
Growth in the nation’s monetary base slowed to 35 percent in April after peaking at 56 percent in February last year even as the BOJ kept a pledge to keep expanding it by ¥80 trillion annually. Despite record stimulus, the BOJ’s key inflation gauge eked out only a small gain in March as the central bank blamed falling oil prices for the slump.
Vicious Circle of Illiquidity
The BOJ’s bond buying is turning the world’s second-biggest debt market into a vicious circle of illiquidity. The government plans to sell ¥152.6 trillion of bonds this fiscal year at auctions the central bank cannot bid in. The BOJ then holds its own tenders to buy from the market about 90 percent of monthly issuance.
Consumer prices rose only 0.2 percent in March from a year earlier after no increase in February, excluding the effect of a sales-tax increase last April. The BOJ on April 30 cut its estimate for core inflation to 0.8 percent for the year through March from a January forecast of 1 percent. The BOJ may find it harder to buy bonds as supply tightens in the secondary market, according to Tokai’s Sano.
The central bank has avoided under-subscriptions at its bond buying operations as institutional investors including the $1.2 trillion Government Pension Investment Fund and Japan Post Bank reduce JGB holdings in line with Kuroda’s efforts to encourage a shift toward riskier assets.
If the BOJ determines that there is a time lag between its bond purchases and increases in consumer prices, it will keep buying notes until inflation picks up, according to Hideo Kumano, the chief economist at Dai-ichi Life Research Institute Inc. in Tokyo and former central bank official. Such a move will harm markets, he said.
