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Kuroda Says Bank of Japan Will Consider Buying Derivatives

March 11, 2013

Bank of Japan (8301) governor nominee Haruhiko Kuroda said that the central bank will consider buying derivatives if he’s confirmed as governor and signaled a readiness for a quick expansion in monetary stimulus.

“We will carefully consider such a proposal,” Kuroda, the Asian Development Bank chief, said in response to a lawmaker’s question in his second Diet confirmation hearing today. Opinions vary on the merits of buying assets such as swaps, Kuroda said, adding that he wants to discuss easing “soon” and bond purchases are likely to remain the key tool.

Kuroda’s confidence that the BOJ can meet a 2 percent inflation target is yet to be reflected among economists, who predict a failure to achieve that goal within two years, according to a Bloomberg News survey this month. Extra stimulus may come as soon as April 4, according to Nomura Holdings Inc. and Mizuho Securities Co., after board member Sayuri Shirai failed last week to win support for a proposal to start open- ended asset purchases immediately.

“This is a communications strategy, rather than an actual policy at this moment,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Kuroda wants to impress the markets. Any type of asset, including derivatives such as interest rate swaps, should be on the table.”

Kuroda said in an interview last month that the BOJ could purchase the equivalent of trillions of dollars of assets to expand its balance sheet.

Rare Move

Central bank purchases of derivatives are rare, according to Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo who has done research for the Bank of Japan.

“This would be a first as a systemic policy,” Schulz said. “Central banks need to be very transparent in regard to the risks involved in buying structured products, and that limits the possibilities for what they can buy.”

In the U.S., the Federal Reserve acquired assets, including derivatives such as credit-default swaps and interest-rate swaps, as part of its $28.8 billion 2008 rescue of Bear Stearns Cos. The Fed said in June 2012 that it had been paid back with interest for its role in the bailout after selling off assets.

Whether buying derivatives could be adopted by the BOJ is “not just an issue of persuading other BOJ board members, but also the technicalities in the market,” said JPMorgan’s Adachi. “If the market is very small and the intervention by the BOJ is significant enough to collapse the market, then perhaps even Kuroda will think it’s not a good idea.”

Index Funds

Kuroda may have been to referring asset-backed securities and index funds, said Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong.

Any such purchases would likely “be small, since increasing the amount of risk assets can potentially threaten the bank’s capital base,” Devalier said. “At the very least a loss-sharing accord with the government is probably a pre- requisite for such a move.”

The central bank currently buys government bonds with maturities of up to three years, as well as exchange-traded funds, real-estate investment trusts and other risks assets, through a fund targeted to reach 76 trillion yen ($791 billion) by the end of this year.

Kuroda has said that the BOJ will do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could begin sooner than the planned January 2014 start. He has also pledged to consider buying longer-term debt.

The BOJ board voted eight-to-one against the proposal by Shirai on March 7, in Governor Masaaki Shirakawa’s final meeting before he steps down with his two deputies on March 19.

Ishida’s View

Board member Koji Ishida said in a speech today that a “sustainable fiscal structure” is important for expanded monetary easing, warning that yields on government bonds could rise if trust in fiscal discipline is lost.

Benchmark 10-year bond yields reached an almost decade low of 0.585 percent on March 5 and finished last week at 0.65 percent. The yield was at 0.66 percent as of 2:15 p.m. in Tokyo.

The yen fell 0.1 percent to 96.11 per dollar, extending its more than 16 percent fall since mid-November, while the Nikkei 225 Stock Average (NKY) was 0.5 percent higher.

A weakening in the yen from “excessive gains” has been predicated on expectations of easing, a circumstance that won’t last forever, Kuroda said today.

Inflation Target

In January, the BOJ adopted a 2 percent inflation target. In a Bloomberg News survey of 15 economists this month, most said that the central bank would probably fail to achieve that goal within two years.

Japan’s machinery orders plunged 13 percent in January, the biggest decline in eight months, signaling limits on corporate investment as Prime Minister Shinzo Abe tries to drive an economic revival.

Paul Donovan, managing director of global economics at UBS AG, said that the impact of the BOJ’s asset buying depends on what banks do with the money.

“If the banking system just accepts the money the BOJ gives them and doesn’t do anything with it, then this money doesn’t go into the economy, it doesn’t go into the foreign exchange markets and it certainly doesn’t create inflation,” he said in an interview today with Bloomberg Television.

The Asian Development Bank said today that it will elect a new president by April 24. Japan, which has held the presidency of the Manila-based ADB since the institution was founded in 1966, last week said it would nominate Vice Finance Minister Takehiko Nakao to succeed Kuroda.

Abe has nominated Kikuo Iwata, an economics professor who backs greater government oversight of monetary policy, and BOJ Executive Director Hiroshi Nakaso for two deputy BOJ governor posts. The upper house confirmation hearing for them is tomorrow.

To contact the reporter on this story: Toru Fujioka in Tokyo at

To contact the editor responsible for this story: Paul Panckhurst at

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