Before the Bank of Japan’s monetary policy board met on Friday, economists wondered quite how aggressive the central bank’s swashbuckling governor, Haruhiko Kuroda, would be. Would he push Japan further into negative interest rates? Would he announce a big increase in the BOJ’s bond purchase programme? Would he find some radical new measure, sending shockwaves through the currency and equity markets?
The answer, it turned out, was none of the above. Kuroda held back from announcing the headline-grabbing stimulus measures economists have come to expect from him.
It is hard to blame him. The BOJ’s monetary policy board met just two days after Prime Minister Shinzo Abe announced a ¥28 trillion ($266.8 billion) fiscal stimulus package, the details of which are still hazy. The decision by the US Federal Reserve to hold interest rates earlier in the week gave Kuroda some breathing room, pushing up the value of the yen against the dollar.
Besides, Kuroda had already unleashed hell-fire on the Japanese market, with little lasting impact.
The Bank of Japan, which now owns more than a third of all outstanding government bonds, plans to buy ¥80 trillion more each year. It has added huge purchases of exchange-traded funds, commercial paper, real estate investment trusts and corporate bonds to the mix. Its bond frenzy has allowed a rebalancing of the government’s pension fund towards equities, helping boost stock prices.
These moves have surely made an impact. It is impossible to know how bad things would have been without them. But the Japanese economy is still in poor shape.
The central bank expects inflation of just 0.1% this year, and economic growth of 1%. Barclays economists think both estimates are too bullish. Japan’s aging population and rigid employment environment give it problems that cannot be solved with even the most aggressive programme of monetary easing.
It is perhaps natural, given these problems, to see the Bank of Japan’s meeting on Friday as a disappointment. HSBC economists, summing up the mood, described the announcements as “a little tweaking at the edges”.
That may be so. But this tweaking goes a long way towards addressing a major problem facing the country’s investors — how to generate yield in a market that appears to offer so little.
Time to go
Japanese investors are increasingly turning to offshore markets to hit their yield targets, buying dollar bonds that offer them a much-better after-swap return. But these dollars need to come from somewhere — and going into the foreign exchange market directly can be both costly and dangerous for investors.
The cheapest way for them to source foreign currencies is by entering into a currency swap agreement with a commercial bank, or with the central bank itself. This is where the BOJ made a real improvement on Friday.
The central bank has doubled the amount it will lend to overseas investors, to $24 billion, and also doubled the maximum it will lend to any one firm, increasing its counterparty limit to $2 billion. That gives much more breathing room for the country’s biggest investors.
This is crucial. The BOJ’s decision to impose negative interest rates in February has sent bond yields plummeting from an already razor-thin level. The pressure on insurance companies and pension funds trying to hit their targets has increased exponentially.
The BOJ is, in a sense, helping the country’s investors escape a situation that it is unable to resolve. But it is also helping stem the chance of a crisis in the pension and insurance industries that would be a major knock on consumer confidence.
That is the last thing Japan needs right now. Kuroda may have disappointed some with his measured approach. But bond investors — and the foreign issuers who will enjoy a boost in demand — should praise him.
Sometimes, the best thing you can do is tweak around the edges.
