BOJ policy review puts spotlight on key policy planning unit

Bloomberg

The Bank of Japan’s unprecedented review of its unprecedented monetary policy has stepped up focus on a key group of Governor Haruhiko Kuroda’s allies.
A trio of top officials in the Monetary Affairs Department, led by Executive Director Masayoshi Amamiya — referred to by some as BOJ — is leading the initiative, according to people familiar with the process who asked not to be named as the discussions are private. Personnel from other important areas within the bank have been asked to report frankly on what has and hasn’t worked in efforts to achieve 2 percent inflation, the people said. Those include the Financial Markets Department that conducts the bank’s massive asset purchases, the Financial Systems group that monitors the banking industry and the Research and Statistics Department.
With more than two weeks until the Sept. 20-21 BOJ-board-meeting deadline, it’s unclear what conclusions will be drawn by the review, the people said. Different constituencies have varying views, with some seeing the study as an opportunity for a revamp that makes the mega-easing more sustainable for the longer haul, and others eager to quash any move to slow down.
Talking points at the review include the benefits and costs of a flattened yield curve, an assessment of efforts to boost inflation expectations and falling liquidity in bond markets, the people said.
“Frankly, I have no idea what will come out,” Ryutaro Kono, chief Japan economist at BNP Paribas SA and a onetime nominee for a BOJ board slot, wrote in a report on Sept. 2. “Speculation over the review is causing uncertainties in markets.”
Amamiya’s lieutenants Shinichi Uchida and Kazuhiro Masaki are helping compile the review. All three have held their roles for longer than is typically the case in the BOJ’s personnel-appointments system — a testament to the value placed on their command of what’s become an increasingly complex stimulus framework.
A piano-playing enthusiast, Amam-iya is in his second stint as monetary-affairs chief, an unusual occurrence. His previous time in the job covered the 2010 introduction of what Kuroda’s predecessor called “comprehensive monetary easing.” A decade earlier, he led the department’s policy planning division in 2000 and 2001, when the central bank raised interest rates only to cut them again months later and adopt quantitative easing.
Masaki, whose BOJ career commenced with the advent of Japan’s economic bust, is now in his fourth year in the policy planning role Amamiya once held; Masaki’s two predecessors each moved within just two years. Masaki’s senior, Uchida, is now into his fifth year in a role his two direct predecessors each held for just one year.
“The BOJ doesn’t want to change them because they are among the best and some of the few who completely understand everything about the current policy,” said Takahiro Sekido, a former BOJ official who is now a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “The personnel shows the BOJ’s intention to minimize any risk of harming this massive easing program.”
Kuroda has said that the review won’t result in a scaling back in easing, nor a change in the mission of aiming for a 2 percent inflation rate as soon as possible — an objective that was codified in a joint statement with the government in January 2013. Deputy Governor Kikuo Iwata cited a desire to assess the financial effects of the BOJ’s easing, while board member Yukitoshi Funo said last week that the review will inform future monetary policy.
Most economists surveyed by Bloomberg interpreted the review unveiled at the July policy meeting to be used for a ramping up in stimulus. Even so, the announcement followed an increase in the number of BOJ officials concerned about the sustainability of the current framework, according to people familiar with the discussions in July. There are three main components to the Kuroda stimulus, each of which has encountered criticism. The purchases of government bonds that form the core of the program have dried up liquidity in that market and led to yields going negative beyond 10-year maturities, causing an extraordinary flattening in the yield curve that presents challenges for long-term investors and the banking industry.
Kuroda on Monday delivered a speech discussing outlines of the review, which included the following among the points:
A reduction in monetary accommodation “will not be considered.” While lending rates have been pulled down by BOJ actions, “one cannot tell” the degree to which they can be further reduced. The impact of the negative-rate policy on bank profits can vary “depending on the duration of the policy.” Declines in long-term yields could lead to an impact on confidence “by causing concerns over the sustainability of the financial function in a broad sense.” Monetary policy should be conducted in a “flexible” manner, and “other new ideas should not be off the table.”
Bankers have complained about the introduction of a negative rate on a share of the cash lenders park at the central bank. The third element of the BOJ’s approach — the buying of risk assets spanning stocks to real estate — has raised questions about corporate governance; the central bank has become an increasingly large shareholder in some private-sector companies.
While economists have floated the idea of purchases of other assets, from local-government bonds to foreign-currency denominated securities, BOJ officials have given no sign that they’re about to adopt any such new tactic. Prime Minister Shinzo Abe said Monday that BOJ purchases of foreign bonds aren’t permitted by law if intended for foreign-exchange intervention.
At the Financial Markets Department, one aspect of the review is looking at the bigger-than-anticipated impact on the yields of longer-term bonds from the introduction of the short-term negative-rate policy.

Another topic is assessing how bond buying has affected the stability of the financial system, according to the people familiar with the talks. While there are no apparent issues within the bank for now, the increasing presence of the BOJ could raise the risk of volatility.
Over in Research and Statistics, a focus is why inflation — which by one key measure is actually negative — is so far from the 2 percent target, according to the people. One view is that the Kuroda easing has changed the “deflationary mindset” of Japanese households and companies, though not completely eradicated the problem.
One explanation for the conundrum: inflation expectations have been more closely tied to current price behavior rather than anticipation of how policy will affect costs in the future.