TOKYO (Reuters) - A reshuffle in the Bank of Japan’s board will tip its balance more in favor of aggressive stimulus just as the bank quietly retreats from its radical monetary experiment, complicating the task of bureaucrats seeking to whittle down its bond purchases.
With inflation still well short of the bank’s 2 percent target, the BOJ is nowhere near dialing back stimulus even as its U.S. and European counterparts eye an exit from ultra-loose policies.
Given the bank’s dwindling policy ammunition, however, many BOJ bureaucrats want to temper market expectations of additional easing and - through careful, delicate communication - lay the grounds for a smooth tapering of asset purchases.
The task could be made more difficult by a reshuffle in the BOJ’s decision-making policy board this month, when two skeptics of huge stimulus leave. One vacancy will be filled by a vocal proponent of huge asset purchases.
The change comes at a time when the BOJ, having failed to drive up inflation for years, shifts its focus to target interest rates instead of the pace of money printing.
“The impact on monetary policy may not come immediately, but the board will clearly have more advocates of big asset buying,” said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.
“That could complicate the BOJ’s efforts to educate markets that its primary focus has become interest rates, not the pace of asset purchases.”
The addition of Goushi Kataoka, an advocate of massive money printing, could deepen a rift in the nine-member board.
Kuroda and a majority in the board believe the BOJ should allow its bond purchases to fall as long as it can keep yields capped at its zero percent target.
But two in the board - Deputy Governor Kikuo Iwata and board member Yutaka Harada - are opposed to any significant slowdown in the BOJ’s bond purchases.
Kataoka, who co-wrote a book with Harada, has stressed the key role big money printing plays in heightening inflation expectations, suggesting he would fall under the camp of Iwata and Harada.
“Full-blown monetary and fiscal policies coupled with a growth strategy are crucial to break completely out of prolonged economic stagnation,” Kataoka, an economist at Mitsubishi UFJ Research and Consulting, wrote in a research note in January.
In September last year, he called on the BOJ to expand stimulus at an early stage to prop up weak inflation expectations. The view runs counter to that of most BOJ policymakers, who prefer to hold off on additional easing given their dwindling policy ammunition.
Kataoka declined to comment, when approached by Reuters this month on whether he maintains these views.
The other vacancy will be filled by Hitoshi Suzuki, a bank executive who analysts predict will take a neutral stance on monetary policy. That would leave the nine-member board with four swing voters.
While most of them will likely side with Kuroda, the increasing presence of those favoring big asset buying could confuse markets if they openly voice opposition to tapering at a time the BOJ’s main scenario is to gradually slow purchases.
“At some point, the BOJ probably wants to abandon a pledge to keep buying bonds at the current pace. That could become difficult with the new board,” said a source familiar with the bank’s thinking.
The BOJ also loses a counter-balance to Kuroda’s radicalism with the departure of Takehiro Sato and Takahide Kiuchi, who dissented to most of his monetary-easing steps.
Sato and Kiuchi were against Kuroda’s pledge in 2013 to set a two-year deadline for hitting his 2 percent inflation target and voiced doubts that heavy money printing can change the public’s perception that deflation will persist.
Their views were dismissed until last September, when stubbornly low inflation forced the BOJ to concede it would take a long time for inflation to hit its target and that changing people’s perception on future price moves wasn’t easy.
Izuru Kato, a long-time BOJ watcher who is chief economist at Totan Research, said Kuroda could have avoided such an about face if he engaged more with the dissenters.
“Instead of taking into account the views of the dissenters, Kuroda rejected them,” he said. “Now he’s paying the price.”
The BOJ is set to cut its inflation forecasts but keep monetary policy steady at a two-day rate review that ends on Thursday, which will be the final policy meeting for Sato and Kiuchi.
The first policy-setting meeting for the newcomers will be held on Sept. 20-21.
Having outliers in the board is important as it helps central banks justify shifting course on monetary policy when the current approach isn’t working, said another source familiar with the BOJ’s thinking.
“In Japan’s case, they could have helped lay the grounds for a future withdrawal of stimulus.”
Editing by Lincoln Feast