Bank of Japan Governor Haruhiko Kuroda has a big problem. His radical monetary policy experiment has always been aimed at convincing the public that an end to deflation is near – and right now the public aren’t listening.
Concerns that a fresh burst of stimulus would be wasted on households and businesses so far unconvinced by the bank’s foray into negative rates, on top of huge money printing, were among the key factors behind last week’s decision to hold off from further easing, according to sources familiar with BOJ thinking.
“There’s a sense of anxiety spreading in the public about the fact the BOJ is implementing these abnormal policies,” said one of the sources. “That may be behind a lack of public support behind more BOJ stimulus.”
Kuroda stressed that he would deploy all available policy means if the BOJ were to act again, suggesting that any further easing would take the form of another “big bang” measure chosen for its psychological impact on the public, analysts said.
But the decision to hold fire – and the market reaction that drove the yen to an 18-month high – has strengthened the voices of skeptics who argue the BOJ’s experiment has run its course.
At Thursday’s rate review, the BOJ pushed back the timing for hitting its 2 percent inflation target for the fourth time in the past year, as weak exports and consumption hurt growth, giving Kuroda good reason to pull the trigger.
Markets were also pricing in the prospect of further easing, which meant Kuroda risked another bout of unwelcome yen rises and stock price falls by standing pat – which is exactly what happened.
But households and companies, still confused about how the central bank’s decision to adopt negative interest rates could help the economy, were in no mood to welcome another round of stimulus just yet, said the sources familiar with BOJ thinking.
That meant using its diminishing policy ammunition now did not make much sense given its likely limited impact on household sentiment, which holds the key to the success of Kuroda’s massive stimulus program, the sources said.
WAR OF ATTRITION
Deflation is seen as the root of two decades of economic malaise in Japan, where expectations that prices will fall have discouraged consumers from spending big and so depressed growth since the 1990s.
The BOJ stunned markets in January when it added negative rates to its massive asset-buying program, dubbed “quantitative and qualitative easing” (QQE), aimed at jolting the economy out of its spiral of falling prices and low growth.
The measures are aimed at pushing down real borrowing costs and heightening public expectations that prices will rise in the months ahead, encouraging companies and households to spend now rather than save.
But there have been scant signs of success.
Households’ inflation expectations fell in March to levels last seen before the BOJ unleashed QQE three years ago, while most firms polled by Reuters did not favor negative rates.
A BOJ survey in March showed that 83.9 percent of households felt price rises were undesirable, up from 82.4 percent three months ago, underscoring the challenges of eradicating the sticky deflationary mindset besetting consumers.
Despite the yen’s ascent, lawmakers and business lobbies have refrained from calling for more BOJ action, with some even saying that the costs of more easing may outweigh the benefits.
Kuroda told reporters on Thursday that the positive effects of January’s easing on the economy should appear in no more than six months, suggesting that the BOJ may consider easing later this year if inflation fails to pick up.
BOJ officials hope that Japan’s recovery prospects will improve around mid-year. They say the key would be whether services prices picked up in the April-June start of the new fiscal year, which would suggest that companies were steadily passing on rising labor costs to consumers.
But many analysts expect the BOJ to slash its inflation forecast again at the next quarterly review in July, as soft global demand and the yen’s renewed spike hurt companies’ profits and discourage them from raising wages.
Some also warn that expanding stimulus under the current framework – which appears to be Kuroda’s plan for now – may prove ineffective in changing public perceptions of price moves.
“The BOJ’s initial strategy was to shock people’s mindset out of deflation. Such shock therapy works only as a short-term strategy,” said Izuru Kato, chief economist at Totan Research and a prominent BOJ-watcher.
“Three years have passed since the BOJ adopted QQE and, in reality, it’s now fighting a war of attrition. If so, I wonder whether sticking to the same ‘shock’ strategy would work.”