Kuroda sprang easing surprise to head off damaging inflation forecast

Sun Nov 9, 2014 4:31am EST
 
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By Leika Kihara

TOKYO (Reuters) - The Bank of Japan Governor not only surprised the markets with his latest splurge of monetary easing. He sprang it on his own board members just two days earlier, jolted into action to stop them making a low-ball forecast that might have sunk his flagship inflation target.

To achieve maximum effect for the shock decision, Haruhiko Kuroda and right-hand man Masayoshi Amamiya kept only a handful of elite central bank bureaucrats in the loop as they laid the ground for the expansion of their quantitative and qualitative easing (QQE) programme.

They didn't even give the usual forewarning to senior bureaucrats at the Ministry of Finance, according to interviews with nearly a dozen insiders and government sources with knowledge of the bank's deliberations.

No leaks reached the media, and the announcement at the Oct. 31 policy meeting pushed the Nikkei stock average to seven-year highs and the yen to seven-year lows against the dollar.

The market reaction will have been welcome news to Kuroda, but the impact he wanted above all was to alter inflation expectations in a country that has struggled with crippling deflation for two decades.

Timing was critical - and not of his choosing. At the policy meeting the board would also issue a new consumer inflation forecast for the next fiscal year, based on the median estimate from the nine members. But two days before publication, the preliminary estimate was only around 1.5 percent, three of the sources said.

That was well below the 1.9 percent forecast made in July, and if published could have been fatal to his key goal of hitting 2 percent from April next year. Since price expectations play a key role in the consumer behaviours that ultimately determine prices, doubts about the target could be self-fulfilling.

There were other triggers for action, including October's plunge in oil prices and the fact that an easing burst would have more market impact in the week the U.S. Federal Reserve decided to turn its own liquidity taps off.   Continued...

 
Bank of Japan Governor Haruhiko Kuroda attends a conference of central bankers hosted by the Bank of France in Paris November 7, 2014.   REUTERS/Charles Platiau