* BOJ hopes to switch to supporting role to Abe's reforms
* BOJ board divided on how long to keep stimulus
* BOJ may clarify later this year conditions for tapering
* Exit far off, debate may heat up if inflation nears 2 pct
By Leika Kihara
TOKYO, May 27 The Bank of Japan has begun
shifting its focus from supporting growth to ways of phasing out
its massive stimulus, taking first tentative steps towards a
potentially momentous move for the world economy.
Current and former central bankers familiar with internal
discussions say an informal debate is under way on how to
prepare for an exit from the BOJ's 13-month-old "quantitative
and qualitative monetary easing."
The stimulus is a centrepiece of Prime Minister Shinzo Abe's
campaign to end two decades of deflation and fitful growth, and
BOJ Governor Haruhiko Kuroda has vowed to keep cheap cash
flowing until his 2 percent inflation target is in plain sight.
But with inflation now past the half-way mark and signs that
the economy has weathered last month's sales tax increase,
Japanese central bankers are already thinking about the next
First of all, Kuroda and his team are keen to avoid market
confusion and volatility that the U.S. Federal Reserve triggered
in May 2013 when it first signaled the possible "tapering" of
its extraordinary stimulus.
With the BOJ churning out 60-70 trillion yen per
year($589-687 billion), withdrawal symptoms could be similarly
acute and the lesson for the BOJ is that signaling a tapering
too soon or being too specific could backfire.
With that in mind, the BOJ has no plans to trim the stimulus
or publicly suggest the eventual drawdown any time soon, say
those familiar with the internal debate.
But whereas weeks or months ago that debate would center on
the potential need for more easing, now there is a strong sense
within the BOJ board that the stimulus so far has worked well
and the next step, albeit distant, could be policy tightening,
not further easing.
Deputy Governor Kikuo Iwata underscored that shift,
reminding markets that the 2 percent inflation goal worked both
"The BOJ's current policy intends to prevent not just
deflation but inflation from well exceeding 2 percent, such as
to 4 percent or 5 percent, for a medium- to long-term period,"
Iwata told a seminar on Monday.
Hideo Hayakawa, a former top BOJ economist who maintains
close contacts with those inside, says the central bank needs to
clarify what will it do after the battle with deflation is won.
"If 2 percent inflation comes into sight, the BOJ should
taper its asset purchases," Hayakawa, a senior executive fellow
at private think-tank Fujitsu Research Institute, told a Reuters
Investment Summit last week.
In public, Kuroda has become more vocal about the need for
government structural reforms, which shows he wants the BOJ to
shift from boosting economic demand to playing a supporting role
as Abe promises deregulation to boost Japan's growth potential.
Keen to shore up public confidence in the BOJ's inflation
goal, Kuroda regularly brushes off questions about an exit
strategy saying the focus should remain on battling deflation.
There is no hard deadline for curtailing asset purchases and
Kuroda keeps reminding investors that the BOJ will not hesitate
to ease further if economic recovery appears at risk.
But central bankers are now expressing more confidence in
their policy and if the economy keeps improving the debate will
intensify about how long the BOJ should maintain its stimulus
after it reaches the two-year mark in April 2015.
Right now, there is no agreement yet among the nine policy
board members on that.
Some, including Kuroda and former International Monetary
Fund economist Sayuri Shirai, stress the "open-ended" nature of
the policy. They argue the BOJ can keep buying government bonds
and other assets until there is convincing evidence that 2
percent inflation will be sustained, say people familiar with
the internal debate.
Former market economist Takahide Kiuchi, however, wants the
current framework to be reviewed next April because he fears
loading up on too much debt will make an exit difficult.
Since the launch of its extraordinary asset-buying scheme in
April 2013, the BOJ has been scooping up about 70 percent of
newly issued government debt, including nearly all new 10-year
benchmark bonds sold by the government.
Public remarks and private conversations with some of the
central bankers suggest the rest of the board, including two
former business executives, stands somewhere in between.
According to central bank insiders, at least two
policymakers believe the BOJ should stay "ahead of the curve"
and seek the exit once there are early signs that inflation is
approaching 2 percent.
Such debate may have been academic when inflation was well
below 2 percent, but will matter more if prices near the target.
"Bond market players don't want to think about an exit and
don't see any need to think about it yet," said Noriatsu Tanji,
bond strategist at Barclays Securities Japan, explaining why
yields have stayed low despite an improving economy.
"But things may change if consumer inflation exceeds 1.5
percent around autumn of this year," he said. That will prompt
investors to price in the chance of a future tapering.
CHANGE OF HEART
The key concern, for now, is to prevent premature
expectations of tapering from disrupting the bond market, where
the government continues to pay 0.6 percent interest on 10-year
bonds despite its heaviest debt load in the industrial world.
BOJ officials do not want to discuss how long the stimulus
may last and what might trigger its withdrawal, which in part
reflects considerable differences within the BOJ on how to
communicate its plans.
Some say the BOJ should clarify the conditions under which
tapering might start, possibly in October when it updates its
twice-yearly economic projections.
"The BOJ may need to change its message to markets at some
point later this year," said a person familiar with the bank's
thinking. "The key is to avoid a spike in bond yields."
Others worry that even mentioning a possibility of an exit
could jolt markets.
Yet the very fact such discussions are taking place marks a
change for the BOJ and Kuroda, whose prime concern has long been
that the stimulus could be scaled back prematurely.
Last month, he surprised markets by saying the BOJ's massive
easing has boosted demand enough to essentially eliminate any
slack in Japan's economy.
At a news conference last week followed by interviews with
two major business newspapers, Kuroda went further, stressing
that demand has been revived enough and it was now up to the
government to remove supply bottlenecks by bringing more women
into the workforce and making it easier to start new businesses.
Some academics argue the BOJ is too coy about tapering and
should start talking about it now rather than wait until markets
start fretting about a possible exit.
"They should be talking about tapering at a minimum, and
they should begin preparing financial markets for a regime after
2 percent, a shift from stimulating aggregate demand to
stimulating aggregate supply," Harvard economist Dale W.
Jorgenson told the Reuters Summit.
"It's not too soon to begin managing expectations of changes
that will take place within next 12 months."
($1 = 101.8250 Japanese Yen)
(Editing by Tomasz Janowski)