The Bank of Japan likely set aside funds for the first time to prepare for losses on its huge holdings of Japanese government bonds should the central bank end its monetary easing policy in the future.
The bank is thought to have reserved about 450 billion yen ($4.07 billion) for the year ended in March. The amount will become known when the BOJ releases financial statements as early as next week.
The BOJ created a framework last fiscal year that permits it to set aside part of the interest income from its JGB holdings, which have ballooned through the bank’s massive monetary easing program. Interest income likely grew about 30% from the prior year to around 1.3 trillion yen in fiscal 2015.
Though BOJ Gov. Haruhiko Kuroda has indicated that the bank could expand easing if it faces difficulty achieving its inflation target, the creation of the reserves is a move to prepare for an exit from monetary easing.
The central bank’s JGB holdings totaled 349 trillion yen as of March 31, up about 180% in three years. Long-term interest rates, currently in negative territory, will rise and bond prices will fall should the BOJ end its monetary easing once it is sure that Japan is finally breaking free of deflation. The bank estimates that a 1 percentage-point rise in long-term rates lowers the value of its JGB holdings by 21 trillion yen.
Bank of Japan Governor Haruhiko Kuroda likes to keep markets guessing by saying one thing and doing another, but, when it comes to ruling out “helicopter money” to reanimate the economy, officials and close associates say he almost certainly means it.
Despite monetary easing on an unprecedented scale over the past three years, data on Wednesday is likely to show Japan’s economy barely grew in the first quarter.
Fears policy makers are out of ammunition has led a growing number of overseas investors to speculate the BOJ might resort to helicopter money – an untested policy in which a central bank permanently expands the money supply that Nobel laureate Milton Friedman likened in 1969 to dropping cash from a chopper.
In practice, such a policy could mean the BOJ printing money to buy debt direct from the government, which would then inject it into the economy through public spending, or accepting perpetual bonds to fund fiscal spending indefinitely.
The BOJ is already helping finance Japan’s huge public debt cheaply by gobbling up government bonds at an annual pace of 80 trillion yen ($737 billion), more than double the amount newly issued each year, but it is buying them in markets.
Some Bank of Japan policymakers stressed the need to expand monetary stimulus further if needed to hit their price target, a summary of opinions from discussions at the central bank’s April rate review showed on Thursday.
The summary also showed the BOJ’s decision to keep monetary policy steady at the April meeting was based on the predominant view in the board that the central bank should take more time to examine how its decision in January to adopt negative interest rates would affect the economy.
“When necessary, the BOJ should take additional steps because downside risks to the economy and prices are large,” one of the nine board members was quoted as saying at the April 27-28 meeting, a view echoed by several other members.
The BOJ held off from expanding stimulus at the meeting, defying market expectations for action even as soft global demand, an unwelcome rise in the yen, and weak consumption threatened to derail a fragile economic recovery.
Though Bank of Japan Gov. Haruhiko Kuroda played up the positive at Thursday’s news conference, economic indicators point to a foundering economy that calls his strategy and his unshakable confidence into question.
The average estimate of 15 private-sector research institutes puts annualized gross domestic product growth for the January-March quarter at just 0.35%. Excluding a 1.2 percentage-point boost from the extra day caused by the leap year would leave growth in negative territory for a second straight quarter, with GDP having shrunk 1.1% in the October-December period.
“Even though growth looks positive on the surface, the economy’s actually weak,” Yoshiki Shinke of Dai-ichi Life Research Institute said.
All eyes are on preliminary GDP data for the quarter, to be released by the Cabinet Office May 18. The data will be a key factor in the government’s decision on whether to raise the consumption tax to 10% in April 2017 as planned.
Kuroda, speaking after the bank’s policy board meeting, asserted that the BOJ can engineer 2% inflation, arguing that growing incomes continue to promote consumer spending. But price and consumption data tell a different story.
Bank of Japan governor Haruhiko Kuroda has dismissed the immediate prospect of “helicopter money” being deployed in Japan, claiming any such extraordinary measures would be illegal under the country’s constitution.
Speaking at a press conference in Tokyo following the BoJ’s latest decision to stay steady on rates cuts, Mr Kuroda said interest rates could still venture further into negative territory.
But despite affirming that there was “no limit” to its monetary policy measures, an embattled Mr Kuroda seemed to rule out the BoJ injecting stimulus directly into the hands of consumers – a policy known as “helicopter money” – claiming it cannot be adopted “under Japan’s current legal system”, according to Reuters.
His comments echo remarks made by ECB chief Mario Draghi earlier this month, who also dismissed helicopter money as illegal under the treaties that govern the eurozone.
Markets have been left disappointed after many analysts had expected further easing from the world’s third largest economy. The yen has duly surged by nearly 2.88 per cent.