It was one thing when Wall Street slammed Haruhiko Kuroda, and the BOJ, for the latest "QQE with Yield Curve Control" monetary contraption unveiled last month by the Japanese central bank as a "disaster", coupled with such dire forecasts "it may be over for the BOJ." But when politicians such Nobuyuki Nakahara, a close advisor to Japan's prime minister on the economy and an intellectual father of the Bank of Japan’s first run at quantitative easing in 2001, say that "Kuroda has ruined his chances of getting a second full term", things start to get serious for everyone's favorite monetary policy Peter Pan.
In a stinging attack on the BOJ's recent actions, Nakahara said during an interview on September 30 that the central bank’s switch to yield-curve targeting compounds its earlier error of adopting negative interest rates (which we learned was launched following "peer pressure" by billionaires and policy makers at Davos, early in 2016) and is a disappointing move away from monetary-base expansion. Abe's advisor also said the decision to conduct a comprehensive review of monetary policy had invited defeat on reflationist efforts and would raise questions about Abenomics as a whole.
Echoing our thoughts on QQEWYCC, Nakahara said that the BOJ is “trying to clean up the mess of negative rates. It’s impossible to do a stupid thing like keeping the yield curve under government control. They changed the regime to rates from quantity, meaning those who support quantitative easing were defeated. Reflationists on the BOJ policy board lost. An exit from deflation is going to be far away." Kuroda has insisted after the BOJ’s policy decision that it hadn’t reached the practical limits of its bond buying and wasn’t moving toward tapering.
Under the new yield-curve regime, the central bank has pledged to keep the yield on benchmark 10-year debt around zero. The problem in this, according to Nakahara, is that if the yield falls further below zero, the BOJ will have to slow its sovereign debt purchases to push the yield back up and markets will interpret this as tapering. This in turn will push the yen up and stocks down. This was explained previously on this website, and was observed in practical terms this past Friday when the BOJ’s indicated purchases for super-long-term debt could see the central bank buying the smallest amount since expanding QQE two years ago. As Bloomberg reporter previously, for the first operations next month, BOJ plans to buy 110b yen for debt maturing in more than 25 years, 190b yen for bonds with maturities of 10 to 25 years, down by 10b yen each compared with the latest operation, the BOJ said on Friday. This would be the smallest purchases of debt of more than 10 years since BOJ expanded quantitative easing in Oct. 2014, and is the definitional equivalent of "tapering."
Perhaps shaken by the comments, in parliament on Monday Bloomberg reported that Kuroda defended his policies and reiterated that there is room for additional monetary easing, adding that the recent changes have strengthened the previous framework and increased the sustainability of his policy. Ultimately, whether or not he will be reappointed to another term is a matter for the government and the parliament to decide, Kuroda said.
Chief Cabinet Secretary Yoshihide Suga told reporters he was "aware that there are various opinions regarding monetary policy among private-sector economists and critics. I want to decline to comment on individual views," said Suga. "The government wants the BOJ to continue make its utmost efforts to reach the price target as early as possible.”
As Bloomberg adds, after being greeted with fanfare when he took the helm, Kuroda, 71, now faces a reversal of fortunes on multiple fronts. Markets - that biggest driver behind "Abenomics" - have moved against him and critics are growing more vocal. The extended honeymoon he enjoyed with a rising stock market and falling yen are long gone and his 2 percent inflation goal is nowhere in sight. Kuroda has less than 19 months to go in his term. While no BOJ governor has been tapped for a second five-year term since the 1960s, Kuroda’s central role in Abenomics has led to speculation that he may be different.
“They should end negative rates, but they took action to save face and offset the failure of negative rates,” Nakahara said. “Bringing the rate up to zero means tightening, causing the yen to rise. The current framework is very vulnerable to external factors.”
Meanwhile, Fitch Ratings said on Monday that the negative rate may be cut to minus 0.5% , from minus 0.1% now, by the end of 2017. This would weigh on the profitability of commercial banks, Fitch said. However, Moody’s Investors Service was more upbeat and raised its forecast for real gross domestic product growth in Japan this year to 0.7 percent.
In June Nakahara suggested that the central bank boost its purchases of Japanese government bonds to 100 trillion yen ($988 billion) a year, from 80 trillion yen. The governor’s propensity to deliver surprises also drew the ire of Nakahara. He described the about-face in adopting negative rates in January - which came the same month as ruling this out - as being “like the attack of Pearl Harbor.”
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One person, however, who did not share Nakahara's gloomy perspective on Abenomics, is RBC's Charlie McElligott, who in a note today, explained why the BOJ's announcement last week merely sets the stage for much more aggressive action in the future.
This is what he said:
KURODA IN A CORNER = ASYMMETRICAL POLICY RISK: The final point above regarding Kuroda mentality and the BoJ is of great importance for global risk assets. Japan is the “weathervane” for markets and their sentiment towards QE monpol, which is how our most recent version of the “taper tantrum” with the global long-end selloff originated there following the Sakurai / JGB curve steepening commentary.
Todd Cross on our Asia USD Rates Trading desk has been making the case that Kuroda is being further ‘backed into a corner’ via the increasingly negative rhetoric from his former peers…which in turn will only make him MORE LIKELY to get asymmetrical on policy at the next meeting. Todd’s view is that the BoJ now has a “free option to exercise” with Kuroda, where since he will be either read as “hero” (if “kitchen-sinking-it” works) or “scapegoat” (if the policy fails, he’ll be out of a job)…so in a sense, the BoJ is liberated to act MORE AGGRESSIVELY on stimulus. This also ties-in nicely to a thought we’ve been discussing for a while now within the “RBC Big Picture” too, which has been the market’s misinterpretation that the BoJ “assessment” outcome was a shift towards ‘curve control / yield targeting,’ and a move AWAY from NIRP…when in fact, we are more confident than ever that the BoJ will be pushing even MORE negative on rates. And “not for nuthin,” but Kuroda himself stated in front of the Japanese Parliament today that the BoJ has further room to add stimulus.
The mix of the market being “lulled to sleep” thinking that the BoJ has “moved away from NIRP” into an increasingly-threatened Kuroda (who, along with Abe, believes that negative interest rates are the ‘key monpol vehicle’ to drive inflation) is a dangerous dynamic for global risk if they do indeed “shock” markets with more NIRP. The most brutal part of this scenario? We could get the ‘policy surprise’ call “right,” but get a completely binary response in $yen / JGB markets. The “macro minds” team is having a ton of debate on whether we see a stronger or weaker $yen if this did indeed “play out.” A purely “mechanical” market response would seemingly see the VERY substantial ‘long Yen’ positioning get spooked by such a surprise and get ‘puked.’ BUTTTTTTT, a view where a policy shock causes a counter-intuitive flight to quality / risk-aversion response in Yen (as experienced since the initial NIRP announcement) could see $yen travel to mid-90s in a heartbeat.
Whatever the outcome for the BOJ, and Kuroda, one thing is increasingly clear: even the central bankers are now in openly uncharted waters, and having largely exhausted most options, not even they know where the hyper-unorthofox monetary policies will take them, which for an entity that can purchase any and every asset using an unlimited source of funds, is a truly concerning place to be.