Bloomberg News

BOJ Split Highlighted as Slumping Stocks Jolt Abenomics: Economy

May 27, 2013

BOJ Governor Haruhiko Kuroda

Haruhiko Kuroda, governor of the Bank of Japan (BOJ), gestures as he delivers a speech during the Future Of Asia conference in Tokyo on May 24, 2013. Photographer: Kiyoshi Ota/Bloomberg

Minutes released by the Bank of Japan highlighted a split among policy makers over achieving 2 percent inflation and mixed views on bond market turbulence after Governor Haruhiko Kuroda cited signs the economy is picking up.

“A few” policy makers said that it’s “highly uncertain whether changes in inflation expectations would lead to a rise in the actual rate of inflation,” according to a record of an April 26 meeting, released today in Tokyo. One member said the bond market may become unstable again, while another said rising rates may point to an economic upturn.

Divisions in the board add to communication challenges for Kuroda, 68, as volatility in the stock and bond markets threatens to undermine business and consumer confidence. Kuroda said yesterday that the economy has clearly started picking up and there are no signs investors have “excessively bullish” expectations. He also cited a report indicating interest rates could rise by between one and three percentage points in an improving economy without causing financial instability.

“Kuroda should have explained why the market is volatile now and why he thinks it’s going to be okay, rather than just saying he doesn’t see any major problem,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. (ACA) in Tokyo. “Kuroda hasn’t yet learned how to communicate well with the market.

‘‘A few’’ BOJ board members said that swings in financial markets had been triggered by perceptions that the BOJ had conflicting goals -- trying to push down interest rates while pursuing inflation, the minutes showed. According to JPMorgan Chase & Co., the BOJ uses the term ‘‘a few’’ to mean two.

The Topix slid 3.4 percent today, after plunging 6.9 percent on May 23. The gauge is up 34 percent this year.

Bonds, Yen

The Nikkei 225 Stock Average lost 3.2 percent today. The yen climbed 0.4 percent to trade at 100.90 against the dollar at 8:21 p.m. in Tokyo. Ten-year government bonds yielded 0.830 percent after touching 1 percent last week, more than triple a record low on April 5.

In the BOJ minutes, ‘‘a few’’ members saw difficulties reaching 2 percent inflation by the end of March 2016.

Kuroda was speaking to the Japan Society of Monetary Economics at Hitotsubashi University, where he was once a professor, two months after taking over as BOJ governor with a pledge to do whatever it takes to defeat deflation. On April 4, he unveiled a plan to double money in the economy over two years by ramping up bond purchases, chasing a target of 2 percent inflation.

There’s ‘‘no sign at this point of excessively bullish expectations in asset markets or in the activities of financial institutions,’’ Kuroda said. He also restated that, while central bank asset purchases are intended to drag yields down, the reverse may happen in an improving economy.

‘‘Corrections in the stock market so far are positive as stocks have gained too rapidly,’’ said Credit Agricole’s Ogata.

‘Highly Uncertain’

Market volatility threatens to sap confidence in the campaign by Kuroda and Prime Minister Shinzo Abe to jolt the world’s third-biggest economy out of a 15-year deflationary malaise. Bill Gross, who oversees the world’s biggest bond fund, said investors should watch the exodus from Japan’s currency and government bonds. Policy makers need to sustain momentum after growth accelerated to the fastest pace in a year in the first quarter.

Kuroda cited an April report on the impact of rising rates on the financial system that indicated that an increase of between one and three percentage points would be manageable, as improving lending margins and rising stocks would offset some of the negative effects.

Dominating Markets

‘‘The BOJ dominates asset markets for better or worse,” Gross, co-chief investment officer at Pacific Investment Management Co., said yesterday in a post on Twitter. “Watch JGBs, the yen and the exodus from each.”

Kuroda also referred to the risk of yields rising because of concern over the sustainability of Japan’s debt, which the International Monetary Fund estimates could reach as much as 245 percent of gross domestic product this year, and urged the government to make progress on fiscal measures.

Population aging, inflexibility in labor laws and a swelling bill for energy imports because of nuclear power shutdowns are drags on the economy. While the yen weakened about 19 percent against the dollar in the past six months, aiding exporters such as Toyota Motor Corp (7203)., Japan’s economic experiment is yet to pump up business investment or wages.

Paul Krugman, a 2008 Nobel laureate in economics, said last week the one-day stock slump didn’t alter his assessment that Abe’s policies are showing signs of working and could serve as an example for the world.

“If Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy,” Krugman wrote in the New York Times on May 24.

China, U.S.

Around the globe, governments are grappling with supporting growth while strengthening public finances or undertaking economic restructuring. As U.S. Federal Reserve policy makers debate paring quantitative easing and austerity measures trigger protests in the 17-nation euro area, China’s Premier Li Keqiang says he wants to find new growth drivers by cutting the state’s role in the economy.

China’s industrial profits grew 11.4 percent in the January-to-April period from a year earlier, a report showed today. Elsewhere around the world, Hometrack Ltd. said house prices in England and Wales climbed 0.4 percent in May from a year earlier. The U.S. is closed for the Memorial Day holiday.

Debt Costs

In Japan, Abe and Kuroda want to fuel prices, wages and growth without triggering a jump in debt-servicing costs that makes the nation’s debt burden unsustainable. In December, Abe led his Liberal Democratic Party to victory in elections by pledging to fire “three arrows” to end stagnation: monetary stimulus, fiscal spending and cutting regulation to increase investment and hiring. He faces a July election in the upper house of parliament, where the LDP is currently in a minority.

While Kuroda is learning the ropes as central bank governor, he has previously been in charge of market-moving policies as the nation’s top currency official. He was Asian Development Bank president from 2005 until his move to the BOJ.

He said last week that the unprecedented stimulus announced by the central bank is sufficient and that the mechanics of bond-buying operations may be adjusted if necessary to limit market volatility.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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