{"id":12051,"date":"2016-09-21T11:03:02","date_gmt":"2016-09-21T11:03:02","guid":{"rendered":"http:\/\/www.biphoo.com\/bipnews\/?p=12051"},"modified":"2016-09-21T11:03:02","modified_gmt":"2016-09-21T11:03:02","slug":"bank-of-japan-fires-in-two-directions-at-once","status":"publish","type":"post","link":"https:\/\/www.biphoo.com\/bipnews\/business\/bank-of-japan-fires-in-two-directions-at-once.html","title":{"rendered":"Bank of Japan Fires in Two Directions at Once"},"content":{"rendered":"

Bank of Japan Fires in Two Directions at Once<\/span><\/strong><\/h2>\n

Bank of Japan Fires in Two Directions at Once<\/strong> : In tribute to incompatibility, central bank sets interest-rate target while retaining bond-buying target .It is a sign that two views are clashing within an organization when it announces plans to do two contradictory things at once.<\/span><\/p>\n

That is what happened at the Bank of Japan on Wednesday with a policy that amounted to a retreat on unpopular monetary easing, paired with language suggesting no retreat was happening.<\/span><\/p>\n

The core of the BOJ\u2019s new policy is a pledge to buy as many or as few Japanese government bonds as necessary to ensure that the yield on 10-year bonds is zero. Simultaneously, the central bank said it would maintain its existing policy of increasing its government-bond holdings by about \u00a580 trillion ($785 billion) a year and said it was \u201cstrengthening monetary easing.\u201d<\/span><\/p>\n

The two goals are incompatible. Imagine a banana trader who assures growers that he will buy as many or as few bananas as necessary to keep the market price at 50 cents a pound, and simultaneously announces plans to buy 80 tons of bananas a year from them. One day, high demand drives the price up to $1 a pound, before the trader hits the 80 ton target. Then what?<\/span><\/p>\n

If the BOJ truly tries to carry out both its new and existing policy, it will eventually run into a similar dilemma. The 10-year JGBs are the benchmark of a bond market worth trillions of dollars. If there was a sudden crash in demand, the BOJ might have to buy more than \u00a580 trillion a year to keep yields at zero. Conversely, demand for 10-year JGBs among risk-averse Japanese investors could be so strong that the BOJ wouldn\u2019t have to buy any bonds.<\/span><\/p>\n

Gov. Haruhiko Kuroda explained the contradiction essentially by disavowing the \u00a580 trillion target. The actual number could \u201cincrease or decrease,\u201d Mr. Kuroda told reporters, handing himself enough wiggle room for a dance party. In banana terms, he said that what he really wants is the 50 cent-per-pound price, and everything else is secondary.<\/span><\/p>\n

By essentially throwing out his old approach, Mr. Kuroda did what his critics had been demanding. It was supposed to lead to 2% inflation but has instead seen prices resume their fall this year. The governor acknowledged his change of heart was partly owing to pressure from bankers and others who didn\u2019t like the previous policy because it was hurting their profits\u2014especially when the 10-year yield was deep in negative territory over the summer.<\/span><\/p>\n

\u201cThe BOJ has clearly shifted its policy, paying attention to the adverse effects of negative rates,\u201d said Koji Toda, chief fund manager at Resona Bank.<\/span><\/p>\n

Why even bother keeping a mention of the \u00a580 trillion target? That is where the internal clashes at the Bank of Japan come in. As The Wall Street Journal reported a week before the meeting, seven of the bank\u2019s nine board members generally favor easing, but they are split on how to do it. In the weeks before the meeting, according to people familiar with the situation, some members raised the idea of centering policy around interest rates, not asset purchases, but they ran into opposition from others who didn\u2019t want any hint of retreat from the \u00a580 trillion yen target.<\/span><\/p>\n

The winner was the interest-rate-targeting faction, and Wednesday\u2019s action made clear that Mr. Kuroda himself was part of that faction. All that was left was to throw the losers a few bones by leaving in the \u00a580 trillion number, at least on paper, and setting a more aggressive inflation target of exceeding 2% instead of just reaching 2%.<\/span><\/p>\n

The final vote in favor of the new policy was 7-2, with expected dissents from two members who aren\u2019t in the easing camp. Mr. Kuroda managed to keep the seven-member bloc united for now. But if the BOJ continues to fail to meet its inflation target, it might become harder to paper over the clashes.<\/span><\/p>\n

Source :<\/strong> http:\/\/www.wsj.com\/articles\/bank-of-japan-sends-mixed-signals-with-new-approach-1474452651<\/span><\/p>\n

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