Factbox-How the BOJ is quietly unwinding Kuroda’s ‘bazooka’ stimulus

September 12, 2021

TOKYO (Reuters) – After years of shock-and-awe monetary stimulus, senior Bank of Japan officials are quietly dismantling radical policies introduced by Governor Haruhiko Kuroda.

Below are details on steps taken so far:

BAZOOKA AND ITS DEMISE

Hand-picked by then Prime Minister Shinzo Abe to pull Japan out of economic stagnation, Kuroda deployed his “bazooka” asset-buying programme in 2013 to shock the public out of a deflationary mindset by pledging to double the pace of money printing to hit the BOJ’s 2% inflation target in two years.

In adopting the policy, dubbed “quantitative and qualitative easing” (QQE), the BOJ changed its policy target to base money from interest rates, and committed to buy government bonds and risky assets such as exchange-traded funds (ETF) at a set pace.

But years of heavy money printing failed to fire up inflation and drew heavy criticism for draining bond market liquidity. Compelled to further ease policy to combat an unwelcome yen spike, the BOJ adopted negative interest rates in January 2016.

That move failed to reverse the yen’s rise and drew more criticism from commercial banks for crushing bond yields and interest margins.

SHIFT TO YCC

Forced to respond, the BOJ adopted yield curve control (YCC) in September 2016, which combined a -0.1% target for short-term rates with a pledge to guide 10-year bond yields around 0%.

In shifting back to interest rate targets, the BOJ conceded that reversing Japan’s deflationary mindset with a wall of money proved tough – the first retreat from Kuroda’s radicalism.

BOND ‘STEALTH’ TAPERING

The BOJ’s shift to YCC relieved it from a fixed commitment to buy bonds. It could slow purchases as long as 10-year yields were capped at zero.

Wary of the BOJ’s huge presence in the bond market, bureaucrats began orchestrating a slow but steady “stealth” tapering of bond purchases.

As inflation kept missing its target, the BOJ in 2018 stopped quarterly disclosures on the expected timeframe for hitting 2% inflation.

MARCH REVIEW

While bureaucrats succeeded in tapering bond buying, they were yet to make headway in streamlining the complicated legacy policies of QQE.

Making things harder, the coronavirus pandemic in 2020 forced the BOJ to respond with more stimulus, including a scheme to pump money via financial institutions to struggling smaller firms.

However, by mid-2020 BOJ bureaucrats began working on a long-term ETF taper plan, encouraged by the calm investor reaction to a slowdown in asset purchases after the market pandemic rout subsided.

After months of internal debate, the BOJ in March this year ditched a pledge to buy ETFs at a set pace and said it would only purchase the assets in times of crisis. It was the start of a stealth taper of risky asset purchases.

The move was part of a BOJ package that followed a review of its policies, and included a compensation scheme to cushion the blow to banks profits from negative rates.

The March package was the most decisive and comprehensive list of measures the BOJ had taken since YCC to address the cost of Kuroda’s policies.

QUASI-FISCAL POLICY

With its policy tools depleted after years of radical stimulus, the BOJ is now veering into areas once considered outside the realm of central banks.

In November last year, the BOJ unveiled a plan to pay 0.1% interest on deposits held by regional banks that cut costs, boost profits or consolidate.

For the first time, the BOJ was offering payouts to a specific industry with the aim of driving change in that sector, a move critics see as a risky deviation into industrial reform.

In July, the BOJ unveiled a plan to boost funding for fighting climate change, which aligns with the government’s broader agenda around carbon neutrality.

The BOJ will not directly buy green bonds and only offer loans to banks that boost green finance. But critics see the move as blurring the line between monetary and industrial policies, and distracting the BOJ from its primary mandate of achieving price stability.

(Reporting by Leika Kihara; Editing by Sam Holmes)

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