Analysis: No Plan B in Japanese central bank's new playbook

Fri Apr 5, 2013 3:56am EDT
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By Leika Kihara

TOKYO (Reuters) - The Bank of Japan's decision to fire one big shot in its fight to end deflation is a clear signal new Governor Haruhiko Kuroda is not one for constant tinkering with settings, and it will take something big for him to load up his policy cannon again.

The Japanese central bank unleashed the world's most intense burst of monetary stimulus at Kuroda's first rate review on Thursday, promising to inject about $1.4 trillion into the economy in less than two years in a radical gamble that sent the yen reeling and bond yields to record lows.

The BOJ has not ruled out more stimulus should the economy face a severe market shock, such as a sudden yen spike, but the threshold for action has become much higher and any future steps would be within the framework established on Thursday, say officials familiar with its thinking.

"It's a different world from when the BOJ acted bit by bit. It offered all it has on Thursday, so there's no such thing as 'what's next' here," one official said on condition of anonymity as he is not authorized to speak publicly.

While aware of the risk of using all its ammunition at once, the board decided to back Kuroda's "big bang" approach that is based on the belief that when the central bank acts, it must use all its resources to maximize the market impact, the officials say.

That said, central bankers do not yet have a clear strategy on how to respond if a yen spike or a global slump pushed the export-reliant economy back into recession and threatened the goal of getting inflation to 2 percent in two years.

Some market players still expect the central bank to come under pressure for further easing in October, if its quarterly review of its long-term economic and price forecasts shows that 2 percent inflation remains distant.

But the officials said that Kuroda's BOJ no longer sees such quarterly reviews as key triggers for policy action.   Continued...

Bank of Japan Governor Haruhiko Kuroda walks into a room as he attends his first monetary policy meeting as BOJ governor in Tokyo, April 4, 2013. REUTERS/Yuya Shino