Kuroda puts yields before yen with BOJ’s credibility at stake

Bloomberg

Bank of Japan (BOJ) Governor Haruhiko Kuroda is determined to stick with targeting long-term bond yields near zero, even as it leaves him increasingly at variance with global peers and propels a
depreciating exchange rate.
At stake for Kuroda is the credibility of his five-year-old policy framework, designed to secure sustained 2 percent inflation. The BOJ has been forced repeatedly to scoop up more Japanese government debt this month as the global selloff in bonds put pressure on Japan’s yields as well.
Doubts remain about Kuroda’s determination, with Australia having been forced to abandon its own version of so-called yield curve control just months ago. Skepticism has been fed by a tumble in the yen that’s undermining Japanese households’ purchasing power — risking a derailing of the economy’s fragile recovery.
A key test looms, when the BOJ releases its bond-purchase plan for the coming three months. Coming on top of special, unlimited bond-purchase operations this week and ramped-up buying, the hope is investors stop trying to push 10-year yields past the BOJ’s tolerance zone.
The cost could be further declines in the yen against the dollar, as currency traders respond to the gap with an increasingly hawkish Federal Reserve. It all sets up a tricky final year in office for Kuroda, the BOJ’s longest-serving and one of its most dynamic governors, as he seeks to round out his decade at the helm by
finally achieving his 2 percent inflation goal.
“Kuroda understands he mustn’t back down from easing,” said Sayuri Shirai, a former BOJ board member under Kuroda’s governorship. “It would be too confusing for markets if the BOJ starts to adjust policy for the currency after such a long pursuit of inflation. The BOJ is different from the RBA,” she said, referring to the Reserve Bank of Australia.
Japan’s central bank insists it will stand its ground with rock-bottom rates because the country’s underlying inflation remains anaemic — in sharp contrast with the US, where the Fed is now rushing to contain the biggest consumer-price increases in four decades.
While the Fed’s preferred core price gauge rose an estimated 5.5 percent in February, Japan’s core inflation is running at an annual rate of only 0.6 percent.
The sharp monetary-policy divergence has prompted a wave of yen selling — though saw some respite — and strained the limits of the Japanese central bank’s monetary easing mechanism.