Assessing the Fed: How the ECB, Bank of Japan might follow
TOKYO - At the Bank of Japan, it was the same old story. The BOJ held monetary settings steady at a policy review on Thursday and asked markets to have faith that inflation will hit its elusive 2 per cent goal.
But board newcomer, Goushi Kataoka, wasn't buying it.
A vocal advocate of aggressive easing who joined the board in July, Kataoka dissented in an 8-1 vote and argued against the central bank's view that current policy was sufficient to boost inflation to its target.
BOJ Governor Haruhiko Kuroda, however, played down any suggestion of a fresh rift in the board that could further delay any plan by the central bank to dial back its massive stimulus.
Kuroda said he saw nothing wrong with having a dissenter in the board and stressed the BOJ's resolve to maintain or even ramp up its massive stimulus program.
"Price moves remain weak and there's still some distance in achieving our price target. The BOJ will continue its powerful monetary easing to achieve 2 per cent inflation at the earliest date possible," Kuroda told a news conference.
"We will take further monetary easing steps if necessary."
As widely expected, the BOJ decided to keep its short-term interest rate target at minus 0.1 per cent and a pledge to guide 10-year government bond yields around zero percent under its yield curve control (YCC) policy.
The BOJ also maintained a loose pledge to keep buying bonds so its holdings increase at an annual pace of 80 trillion yen ($717.6 billion), diverting from the U.S. Federal Reserve's plan to steadily pull back from crisis-era measures.
Kataoka expressed skepticism about the BOJ's conviction on hitting 2 per cent inflation.
"Given excess supply capacity remaining in the capital stock and labor market, monetary easing effects gained from the current yield curve aren't enough to achieve 2 percent inflation around fiscal 2019," as projected by the BOJ, Kataoka said in a statement announcing the policy decision.
The former economist did not propose lowering rates but said inflation was unlikely to accelerate toward 2 percent from next year, signaling the need for further easing steps to nudge up consumer inflation from current levels of around 0.5 per cent.
Kataoka and former banker Hitoshi Suzuki, who voted with the majority of the board, replaced former market analysts Takahide Kiuchi and Takehiro Sato, who had voiced doubts on Kuroda's radical monetary experiment.
"Kataoka is on his own for now and hasn't proposed additional easing. It is a question of whether other board members swing to his side," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
"Kataoka has expressed doubt about the effects of YCC, which will spur some debate about how YCC is managed and could lead to some minor adjustments or talk about additional easing via another channel," he said.
BOJ TO LAG FED
The announcement came hours after the Fed's decision to leave interest rate unchanged and a signal it still expects one more increase by the end of the year, which pushed the dollar to a two-month high against the yen.
Kuroda said it was "natural" for central banks to take diverging policy paths since inflation expectations were not anchored at 2 per cent in Japan, unlike in the United States and Europe where they were moving around that level.
Kuroda sidestepped questions on whether an expected snap election in Japan could affect the BOJ's policies, saying only that the central bank's chief mandate was to achieve its price target.
Government sources have told Reuters premier Shinzo Abe is considering calling a snap election as early as next month and will pledge to use some of the revenue from a scheduled sales tax hike in 2019 to fund spending on education and child care.
That would force the government to delay the timing for achieving its fiscal consolidation target, a set-back for Kuroda who has consistently called on the need to get Japan's tattered fiscal house in order.
Some analysts say any delay in fiscal reform could put the central bank under pressure to keep borrowing costs ultra-low for longer than it wants.
Kuroda said that while fiscal and tax policies fell under the jurisdiction of the government, restoring fiscal health was the most important aspect of fiscal policy.
"Fiscal discipline could affect market trust in Japanese government bonds," he said.
"Theoretically, there's a risk interest rates may rise if confidence in the Japanese government bond market is eroded."