BOJ Seen by Economists as Almost Certain to Hold Fire on Nov. 1

(Bloomberg) -- The overwhelming majority of economists surveyed by Bloomberg News expect the Bank of Japan to keep stimulus unchanged when Governor Haruhiko Kuroda and the policy board meet Oct. 31-Nov. 1 to assess the progress of their new yield-control framework.

In a sign of how much perceptions have changed since the decision last month to shift the focus from expanding the money supply to controlling interest rates, some 35 percent of analysts in the Bloomberg poll think that Kuroda’s BOJ is done with adding to stimulus. Just two of the 43 respondents project action next week; in both cases they forecast a cut in the negative interest rate on some commercial bank reserves to minus 0.2 percent.

Click here to see the full survey, which was conducted Oct. 21-25.

Asked how the central bank may adjust policy at the gathering next week or at future meetings, 27 people in the survey pointed to a reduction in the negative rate, which is currently minus 0.1 percent. The next most popular option was a change in the zero percent target for the yield on 10-year Japanese government bonds, which was chosen by four of the analysts.

Two suggested an increase in purchases of Japanese real estate investment trusts and one said the BOJ may buy more exchange-traded funds. Nobody expects the central bank to increase the pace of expansion in the monetary base or purchases of JGBs.

Yield Focus

“Even if the BOJ delays the timing for hitting its 2 percent inflation goal, it won’t do further easing unless negative economic risks jump or the yen surges,” said Ryutaro Kono, chief Japan economist at BNP Paribas SA. “The amount of JGB purchases isn’t an operational target any more and they’ll just buy what’s needed to keep the long-term yield target.”

Kono was among the economists who suggest that, in time, there will be a gradual reduction in the amount of government-bond buying.

"But the BOJ doesn’t want that to be the market’s focal point or to give an impression of tapering,” he said.

While about 10 percent of analysts estimate that JGB purchases may be scaled back this year, the vast majority think tapering won’t start until 2017 or later.

Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co., said that the BOJ will begin a cutback in April 2017 or later, once the market gets used to the new policy framework.

Kuroda said on Oct. 21 in parliament that he doesn’t see the immediate need to back away from 80 trillion yen ($765 billion) for annual bond-buying, but that in the future it may not be necessary to buy that amount.

Tolerating Volatility

While keeping the 10-year yield around zero is key to the new framework, Kuroda said in a Bloomberg interview earlier this month there may be times when rates miss the target, though he’s confident yield control will succeed.

According to people familiar with discussions inside the central bank, officials are likely to tolerate larger movement in 10-year yields from their target in times of volatility than they will when market movement is more orderly. In times of an orderly market, including gradually declining yields, the BOJ will be ready to reduce purchases of bonds to keep near the zero target, they said.

Ten-year JGBs yielded minus 0.07 percent as of 10 a.m. Wednesday in Tokyo, from a record-low minus 0.3 percent reached in July.

The central bank is also scheduled to provide updated inflation and economic growth forecasts on Nov. 1.

Economists will also be on the lookout for any change to the current time for hitting 2 percent inflation sometime in the fiscal year ending March 2018. Only one analyst in the Bloomberg survey thinks this is realistic.

If the BOJ is forced to push back the time frame, this won’t lead to expanded stimulus, said Yasunari Ueno of Mizuho Securities Co., who noted that the central bank has already shifted its stance for a long-term, sustainable strategy.

“If they take action, that will be for dealing with the yen’s spike against the dollar,” said Ueno.

(Adds yield on 10-year JGB as of Wednesday morning in Tokyo.)

--With assistance from Dru Ann Love Tomoko Sato and Kevin Buckland To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net, Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net. To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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