The Bank of Japan’s (BOJ) equivocation on its inflation target is adding to the shifting global monetary policy picture that has sparked a sovereign debt rout.
Japan’s 10-year yield has risen almost 10 basis points since BOJ Governor Haruhiko Kuroda said on Thursday last week that he sees the price goal being reached around the first half of the next fiscal year (ends March 2017).
When Kuroda introduced his record bond-buying plan in April 2013, he said he expected the goal would be reached in about two years. 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.
“It’s difficult for the BOJ to meet its inflation target and a failure of the current policy framework will spur talk of a technical exit,” said Kazuhiko Sano, chief bond strategist at Tokai Tokyo who correctly predicted Japan’s 10-year yield would fall to 0.25 percent by March. “The BOJ will need to overhaul the fundamental framework of its quantitative and qualitative easing.”
The whispers of unquiet in Japan’s markets coincided with a slump in bonds across the world on prospects that US interest rate increases would kill off the bull-run in sovereign debt that took yields to unprecedented lows. Benchmark Japanese securities had their biggest decline in three months on Thursday after US Federal Reserve Chair Janet Yellen said on Wednesday that yields on US Treasury bonds were too low.
Growth in Japan’s monetary base slowed to 35 percent last month after peaking at 56 percent in February last year, even as the BOJ kept a pledge to keep expanding it by ￥80 trillion (US$667 billion) 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.
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 in April last year. The BOJ last week cut its estimate for core inflation to 0.8 percent for the year through March from a January forecast of 1 percent.
Kuroda said on Thursday last week there is no change to the central bank’s pledge to meet its objective as soon as possible even as he said there has been a delay in reaching the goal. Projections for CPI tumbled after the BOJ’s policy meeting that day.
“Key here is that the BOJ upholds its commitment by seeing a 2 percent inflation for fiscal 2016 and 2017 during its projected period,” said Chotaro Morita, the chief rates strategist in Tokyo at SMBC Nikko Securities Inc. “The BOJ is fading out of the two-year commitment and shifting to promising to achieve the goal as early as possible.”
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