Bank of Japan (8301) governor nominee Haruhiko Kuroda said that the central bank will consider buying derivatives if he's confirmed as governor and signaled a readiness for a quick expansion in monetary stimulus.
"We will carefully consider such a proposal," Kuroda, the Asian Development Bank chief, said in response to a lawmaker's question in his second Diet confirmation hearing today. Opinions vary on the merits of buying assets such as swaps, Kuroda said, adding that he wants to discuss easing "soon" and bond purchases are likely to remain the key tool.
Kuroda's confidence that the BOJ can meet a 2 percentinflation target is yet to be reflected among economists, who predict a failure to achieve that goal within two years, according to a Bloomberg News survey this month. Extra stimulus may come as soon as April 4, according to Nomura Holdings Inc. and Mizuho Securities Co., after board member Sayuri Shirai failed last week to win support for a proposal to start open- ended asset purchases immediately.
"This is a communications strategy, rather than an actual policy at this moment," said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. "Kuroda wants to impress the markets. Any type of asset, including derivatives such as interest rate swaps, should be on the table."
Kuroda said in an interview last month that the BOJ could purchase the equivalent of trillions of dollars of assets to expand its balance sheet.
David Fuller's view There is certainly nothing tentative about the reflationary efforts of new Prime Minister Shinzo Abe and his team, in which Haruhiko Kuroda will be a key member as BoJ Governor. Their efforts resemble a blitz relative to Japan's largely dysfunctional governance over too many years.
This shock and awe effort to end Japan's long disinflationary and deflationary slide is surely appropriate, given recent public opinion polls which are extremely favourable and at levels that probably cannot be sustained beyond the medium term, once the novelty wears off.
Meanwhile, Fullermoney maintains that Japan's current reflationary efforts are not only long overdue, but also very likely to succeed. We would continue to give the new government the benefit of the doubt, at least while the market's verdict remains so positive.
Inevitably, there will be some problems, not least Japan's current energy costs. These soared as nuclear power stations were closed following the Fukushima accident, caused by a massive tidal wave following the offshore earthquake exactly two years ago. Energy import costs are the main disadvantage of the soft yen policy and quake prone Japan can ill afford another serious disruption. Lastly, territorial disputes with an emboldened China remain a concern.
Nevertheless, investors are benefiting from the combination of long positions in Japanese equities, hedged with short yen positions. These trends have been very strong since last November and they have recently renewed their directional moves following consolidations (see below). Japan still has potential to surprise on the upside.