The Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, Governor Haruhiko Kuroda said Friday, marking the first time he’s provided any clear guidance on timing for normalizing policy.
The yen surged, gaining as much as 0.5 percent to 105.71 per dollar, while yields on Japanese sovereign debt climbed across the curve. The Nikkei 225 Index closed 2.5 percent lower and the Topix Index fell 1.8 percent.
“Right now, the members of the policy board and I think that prices will move to reach 2 percent in around fiscal 2019. So it’s logical that we would be thinking about and debating exit at that time too,” he said. “I’m not saying that the negative rate of 0.1 percent and the around 0 percent aim for 10-year bond yields will never change, but it is possible. We will be discussing that at each policy meeting.”
In testimony that lasted about three hours, Kuroda said that this doesn’t affect his “overshooting commitment,” which pledges the BOJ to continue expanding the monetary base until inflation exceeds 2 percent in a stable manner. Even with the recent easing in the pace of bond purchases by the central bank, the monetary base is still increasing at an annual pace of more than 9 percent.
“The BOJ’s stance is that in around fiscal 2019 inflation will reach 2 percent,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “If inflation rises above 2 percent, to be honest it’s just logical to consider an exit strategy around then.”
With the Federal Reserve already raising rates and the European Central Bank debating normalization, Kuroda has been under increasing pressure to provide details on when the BOJ may follow suit. While the outlook for prices and the economy have pointed for quite some time of the need to mull an eventual exit, Kuroda’s acknowledgment of this is significant.
What our economist says
“Kuroda is no novice when it comes to communicating with the markets, and was surely aware that making the BOJ’s thinking on the timing of exit explicit would spark a reaction,” said Bloomberg Economics’ Yuki Masujima. “By making the timeline more concrete, he’s put down a marker — and the market is likely to hold the BOJ to account as the time approaches. In terms of substance though, little has actually changed in the BOJ’s policy trajectory. Bloomberg Economics is sticking to its view that the BOJ will tweak its policy framework in October this year.”
Data earlier Friday showed movement in prices and the job market that should help the central bank. Japan’s unemployment rate fell to 2.4 percent, the lowest since 1993, while inflation in Tokyo rose more than expected in February, suggesting prices could move higher nationwide.
Kuroda, whose testimony to parliament will resume on March 6, said stable 2 percent inflation isn’t possible without wage growth of more than 3 percent. Pay gains are still well below this level even as the labor market continues to tighten.
Noting that the increases in consumer prices are still quite far from the target, Kuroda went on later to say he felt cautious or negative about changing the 0 percent target for bond yields now.
The next meeting of the BOJ policy board is March 8-9, with no changes in stimulus expected.
Rob Carnell, ING Bank’s chief economist for the Asia Pacific in Singapore, said that when the European Central Bank begins to formally normalize its own monetary policy, it may provide a window for the BOJ to act as well.
“You don’t want to be the odd-man out in this game,” said Carnell.