BoJ has a fresh dissenter

A positively surprising dissent from the new joiner

Stacking his board with yes-men and woman has been one of the criticisms directed toward BoJ Governor Haruhiko Kuroda. Thus, it was a positive surprise when BoJ policy statement today revealed that there was one member dissenting to the policy decision. Takeshi Kataoka, who cast his vote for the first time today, dissented to the majority decision arguing that the current policy actions are not stimulative enough to generate 2% inflation. He did not suggest his own proposals to achieve the policy goal though. It is not entirely clear whether Mr. Kataoka prefers the BoJ to adopt a stronger easing policy or prefers the BoJ to change its policy target. It is probably the former, as Mr. Kataoka was known to support the goal of reflation in the past, and he was probably not yet ready to propose a specific policy. We would know more when BoJ publishes “Summary of Opinions” on September 28th. Naturally, reporters tried to find out more about the nature of Mr. Kataoka’s dissent in the press conference given by Governor Kuroda today, but he was tight-lipped and did not reveal any additional information beyond what were written in the policy statement.

What stimulative measures could Mr. Kataoka propose? 

What could Mr. Kataoka propose to strengthen the stimulative effects of Japan's monetary policy? His past work as a private think-tank economist suggests that he advocates fiscal measures to boost demand but he does not believe negative interest rates to be effective. As fiscal policy is not a direct option for the BoJ, he may advocate other measures to boost demand, such as encouraging yen to weaken with the BoJ purchasing foreign currency denominated bonds. 

Kuroda unusually tight-lipped in the press conference

Other than Kataoka’s dissent, there was little news from BoJ today. During the press conference, Governor Kuroda was tight-lipped in his answers to most questions from the press. Reporters quizzed Governor Kuroda repeatedly for his views on the state of fiscal policy in Japan, but he was careful not appear critical of Prime Minister Abe’s apparent decision to abandon efforts to eliminate the primary fiscal deficit by 2020. In our view, the only piece of information somewhat interesting was that Governor Kuroda singled out labor market and social security reforms as critical structural reforms the Japanese government should tackle. Otherwise, Governor Kuroda stuck to his not-so-convincing belief on how the current monetary policy in Japan should be sufficient for the BoJ to achieve its policy goals. 

BoJ should keep its target unchanged

In our observation, the voices against BoJ's aggressive monetary easing measures have been rising in Japan. Most economists belonging to Japanese financial institutions tend to advocate dropping the negative interest rate policy and removing the 0.1% cap on the 10-year rate. Others, including a number of prominent former BoJ economists, advocate lowering the inflation target to 1%. On these issues, we are sympathetic to Governor Kuroda. In our view, the rise we are seeing in positive GDP gap provides with an opportunity to generate inflation in Japan. Fortunately for Japan, the global growth prospect seems benignly positive and the rise in overseas interest rates should enable the yen to depreciate. The BoJ should stand firm in its current easing stance to take advantage of these developments. We do not agree with the BoJ on the equity ETF purchase policy though. In our view, it exposes the BoJ to steep financial risks and the benefit of purchasing ETFs in the current bull-market environment is unclear. The BoJ should save its firepower for the rainy days when the market confidence is lost. Otherwise, we hope the BoJ would withstand the lobbying efforts from financial industry and remain steadfast in its aggressive easing stance.

BoJ's equity ETF holding will be triple the size of its capital by end-2018