TOKYO, (Reuters) -Governor of the Bank of Japan (BOJ) Haruhiko Kuroda dismissed the possibility of a near-term exit from ultra-loose monetary policy on Monday, despite markets and officials signalling a growing concern on what follows after Kuroda’s term ends.
Investors have kept pushing up the rates on Japanese government bonds (JGBs) because they expect the BOJ to ease up on yield control once a new governor takes over in April 2019, when Kuroda’s second five-year term ends.
Focusing on a time after Kuroda was also shown by Prime Minister Fumio Kishida’s comments on Monday. He said that a decision on whether to change Japan’s 10-year-old plan to fight deflation will be made after a new BOJ governor is chosen.
“It’s something for once the new BOJ governor is chosen,” Kishida said in a seminar, alluding to potential revisions the government may seek to its joint statement with the BOJ, which pledges the central bank to reaching a 2% inflation target as soon as possible.
Last week, the BOJ surprised the markets by widening the range around its 10-year JGB target. This was done to help pay for some of the costs of continuing stimulus.
Kuroda stated on Monday that last week’s decision was intended to boost the impact of the government’s ultra-easy monetary policy, and not as a precursor to the withdrawal of its enormous stimulus package.
“This is in no way a step toward the exit. The Bank would seek to attain its price target in a durable and steady manner, complemented by wage increases, by maintaining yield curve-controlled monetary easing “Kuroda stated in an address to the business lobby Keidanren:
However, according to Kuroda, wage growth would likely expand gradually due to intensifying labour shortages and structural changes on Japan’s job market, which are causing higher compensation for temporary workers and an increase in the number of permanent workers.
“Japan’s labour market conditions are expected to tighten further, and firms’ pricing and wage-setting behaviour may also shift,” Kuroda stated.
“In this way, Japan is getting close to a turning point if it wants to get out of a long period of low inflation and slow growth,” he said.
The rate at which the BOJ could raise its yield curve control (YCC) targets, which are set at -0.1% for short-term interest rates and about 0% for 10-year bond yields, is believed to be contingent on the strength of wage growth.
The BOJ’s unrelenting bond purchases to preserve the yield cap have attracted significant public criticism for distorting market pricing and caused an unwanted yen decline that boosted the price of importing already-expensive raw commodities.
According to sources cited by Reuters, Kishida’s administration will consider revising next year the joint statement that focuses on steps to combat deflation – a goal that has become misaligned with recent increases in inflation and has prevented the BOJ from adjusting monetary policy with greater flexibility.
Analysts believe that such a change would increase the likelihood that the BOJ will adjust its ultra-low interest rates.
On Monday, the yield on two-year JGBs temporarily reached 0.225%, the highest level since 2015, due to expectations of an imminent rate hike. The yield on 10-year JGBs increased to 0.445%, close to the new band’s upper limit of 0.5%.
Kishida provided little hints about his decision for the future governor of the Bank of Japan, stating merely that the new appointee will be the individual “deemed most acceptable at the time.”