Exclusive: BOJ Review Expected to Support Massive Stimulus Program

By Leika Kihara

TOKYO – The Bank of Japan (BOJ) has developed a preliminary outline for a comprehensive review of its monetary policies set to be unveiled next month. This review will reiterate the bank’s commitment to achieving a 2 percent inflation target as swiftly as possible, according to sources familiar with the situation.

The draft indicates that declines in oil prices, the long-lasting impact of a sales tax increase in 2014, and Japan’s persistent deflationary mindset have been obstacles to reaching this inflation goal. By attributing low inflation to external factors, the BOJ may use this review to justify its current policy framework amid increasing criticisms that extensive monetary easing over the past three years has not met its inflation objectives.

One source, who wished to remain anonymous due to the sensitive nature of the matter, remarked that the findings would likely conclude that the quantitative and qualitative easing (QQE) measures implemented and expanded in 2014 have been effective.

Last month, the BOJ’s announcement of the review led to the largest sell-off in government bonds in over three years. Traders speculated that the central bank might be succumbing to a limited array of policy tools, prompting expectations that it could start tapering its asset purchases.

Conversely, some market participants predicted that the review could allow for a transition to more unconventional measures, such as "helicopter money," which involves monetizing government debt by issuing perpetual bonds.

For investors anticipating this shift, a review that defends existing policies may be disappointing unless it is paired with an increase in QQE or a further reduction in interest rates.

The outline currently does not provide explicit recommendations for future monetary policy direction, but its overall tone implies that a tapering of the BOJ’s significant stimulus efforts is unlikely, according to sources. Ongoing debates among the board members have left several issues unresolved, including whether the introduction of negative rates in January has effectively energized inflation.

The review will also examine the prolonged decline in yields, particularly for 20- and 30-year bonds, and the potential negative impact that the flattening yield curve could have on financial institutions’ profitability.

The draft is subject to revisions based on discussions among the nine-member BOJ board, and a bank spokesperson declined to comment on the matter.

Officials had been working on the review’s outline weeks before its July announcement, suggesting that the assessment is more likely to defend existing policies rather than initiate a comprehensive overhaul.

In July, the BOJ eased its policies, although not as dramatically as the financial markets had anticipated, resulting in a stronger yen and a sell-off in Japan’s stock market. During that meeting, it also committed to a thorough evaluation of its stimulus strategy at the upcoming rate review scheduled for September 20-21, which will assess the strengths and weaknesses of its current approach combining negative rates with an expansive asset-buying program initiated in 2013.

BOJ Governor Haruhiko Kuroda has indicated that the review will focus on strategies to expedite the achievement of the price target, suggesting that it will not lead to a reduction in stimulus measures. One source stated, "It will be more about refining the strategy for reaching 2 percent inflation. It won’t involve eliminating negative rates or tapering bond purchases."

As the September rate review approaches, there remains no consensus on how the findings could influence future monetary policy decisions, the sources noted. Another source remarked that "the assessment will likely be communicated in a way that affords the BOJ substantial flexibility regarding monetary policy choices."