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26-05-2013, 08:36 AM
BOJ's Kuroda Struggles with Yield Rises, Dilemma of Untested Policy
By Takashi Nakamichi
689 words
25 May 2013
Dow Jones Top Energy Stories
DJTES
English
Copyright © 2013 Dow Jones & Company, Inc.
TOKYO--Less than two months after declaring that the Bank of Japan would push down bond yields to spur economic activity and beat deflation, Gov. Haruhiko Kuroda has found himself struggling with an unexpected rise instead, a reminder that the bank's drastic easing measures are an untested policy experiment.
Massive purchases of Japanese government bonds by the bank, amounting to 70% of newly issued debt, were supposed to bring down long-term interest rates, lower borrowing costs for businesses and households, and lead them to invest and spend, a step towards exiting 15 years of deflation.
But the bond market has defied the BOJ's intentions, with the yield on the benchmark 10-year JGB hitting 1.0% on Thursday, the highest level in over a year. That compares with the record low of 0.315% marked on April 5, a day after the BOJ adopted measures to double the amount of money it pumps into the economy to achieve 2% inflation in two years.
Complicating matters for Mr. Kuroda is the fact that expectations for the BOJ's easing of a "different dimension" have already improved market sentiment, while the economy recorded solid growth in the first quarter, factors that would typically push up interest rates.
Prior to Thursday's sell-off, the Nikkei Stock Average had risen 50% and the yen--whose persistent strength was hitting Japanese exporters hard--had weakened nearly 20% since the start of the year, helped by the BOJ's April decision.
The difficulty of Mr. Kuroda's position was evident in his comments at a press conference Wednesday following the BOJ's policy board meeting.
In a departure from his motto of being clear and simple, Mr. Kuroda's explanation on the bond yield rises was complex, prompting reporters to pose the same question repeatedly throughout the 50-minute session.
"It is difficult to say simply whether this is a good interest rate increase or a bad one," Mr. Kuroda said, acknowledging that hopes for economic recovery and inflation will also push up rates.
Such expectations for better economic conditions are at the core of what the BOJ is trying to achieve, along with keeping rates low to stimulate economic activity.
So while cautioning that climbing yields warrant close monitoring, Mr. Kuroda also said: "At this point, I am not expecting them to have any significant impact on the real economy." The 10-year JGB yield was at 0.885% on Wednesday before Mr. Kuroda spoke.
He also said the BOJ's bond purchases will "continue to exert downward pressure on interest rates." And as the BOJ is also prepared to use its market operations "flexibly" to counter volatility in the debt market, he is "not expecting sharp spikes" in long-term JGB yields ahead as a result.
In line with such a pledge, the BOJ injected funds into the market on Thursday, bringing the yield back below 1.0%.
But the lack of liquidity resulting from the BOJ's large-scale purchases is expected to keep market conditions turbulent, and Mr. Kuroda admitted the bank's control over bond yields is limited.
Mr. Kuroda said long-term rates are "largely influenced by expectations for inflation and economic growth, and it is correct to say that a central bank can't hold them under its complete control."
That's in stark contrast from his comment in April when the BOJ introduced its current measures.
"Pulling lower the whole yield curve is precisely one intermediary goal of this quantitative and qualitative monetary easing policy," Mr. Kuroda said at the time. "As a matter of course I believe that (bond) prices will rise and yields will fall."
And analysts point to an inherent dilemma in the bank's policy.
"There is the dichotomy of what the BOJ's trying to do, which is spark inflation, which is bad for bonds, and then what they're actually doing, which is buying bonds," said Teruyoshi Sotome, strategist at Mizuho Securities.
Write to Takashi Nakamichi at takashi.nakamichi@dowjones.com
Dow Jones & Company, Inc.
Document DJTES11020130524e95o00015
By Takashi Nakamichi
689 words
25 May 2013
Dow Jones Top Energy Stories
DJTES
English
Copyright © 2013 Dow Jones & Company, Inc.
TOKYO--Less than two months after declaring that the Bank of Japan would push down bond yields to spur economic activity and beat deflation, Gov. Haruhiko Kuroda has found himself struggling with an unexpected rise instead, a reminder that the bank's drastic easing measures are an untested policy experiment.
Massive purchases of Japanese government bonds by the bank, amounting to 70% of newly issued debt, were supposed to bring down long-term interest rates, lower borrowing costs for businesses and households, and lead them to invest and spend, a step towards exiting 15 years of deflation.
But the bond market has defied the BOJ's intentions, with the yield on the benchmark 10-year JGB hitting 1.0% on Thursday, the highest level in over a year. That compares with the record low of 0.315% marked on April 5, a day after the BOJ adopted measures to double the amount of money it pumps into the economy to achieve 2% inflation in two years.
Complicating matters for Mr. Kuroda is the fact that expectations for the BOJ's easing of a "different dimension" have already improved market sentiment, while the economy recorded solid growth in the first quarter, factors that would typically push up interest rates.
Prior to Thursday's sell-off, the Nikkei Stock Average had risen 50% and the yen--whose persistent strength was hitting Japanese exporters hard--had weakened nearly 20% since the start of the year, helped by the BOJ's April decision.
The difficulty of Mr. Kuroda's position was evident in his comments at a press conference Wednesday following the BOJ's policy board meeting.
In a departure from his motto of being clear and simple, Mr. Kuroda's explanation on the bond yield rises was complex, prompting reporters to pose the same question repeatedly throughout the 50-minute session.
"It is difficult to say simply whether this is a good interest rate increase or a bad one," Mr. Kuroda said, acknowledging that hopes for economic recovery and inflation will also push up rates.
Such expectations for better economic conditions are at the core of what the BOJ is trying to achieve, along with keeping rates low to stimulate economic activity.
So while cautioning that climbing yields warrant close monitoring, Mr. Kuroda also said: "At this point, I am not expecting them to have any significant impact on the real economy." The 10-year JGB yield was at 0.885% on Wednesday before Mr. Kuroda spoke.
He also said the BOJ's bond purchases will "continue to exert downward pressure on interest rates." And as the BOJ is also prepared to use its market operations "flexibly" to counter volatility in the debt market, he is "not expecting sharp spikes" in long-term JGB yields ahead as a result.
In line with such a pledge, the BOJ injected funds into the market on Thursday, bringing the yield back below 1.0%.
But the lack of liquidity resulting from the BOJ's large-scale purchases is expected to keep market conditions turbulent, and Mr. Kuroda admitted the bank's control over bond yields is limited.
Mr. Kuroda said long-term rates are "largely influenced by expectations for inflation and economic growth, and it is correct to say that a central bank can't hold them under its complete control."
That's in stark contrast from his comment in April when the BOJ introduced its current measures.
"Pulling lower the whole yield curve is precisely one intermediary goal of this quantitative and qualitative monetary easing policy," Mr. Kuroda said at the time. "As a matter of course I believe that (bond) prices will rise and yields will fall."
And analysts point to an inherent dilemma in the bank's policy.
"There is the dichotomy of what the BOJ's trying to do, which is spark inflation, which is bad for bonds, and then what they're actually doing, which is buying bonds," said Teruyoshi Sotome, strategist at Mizuho Securities.
Write to Takashi Nakamichi at takashi.nakamichi@dowjones.com
Dow Jones & Company, Inc.
Document DJTES11020130524e95o00015