December 19, 2019 / 3:24 AM / a month ago

BOJ's Kuroda warns of risks to Japan economy despite trade war truce

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda said the global economic outlook has brightened somewhat due to a preliminary U.S.-China trade deal but warned that risks to Japan’s recovery remain high, signaling his resolve to keep the money spigot wide open.

FILE PHOTO : A security guard walks past in front of the Bank of Japan headquarters in Tokyo, Japan January 23, 2019. REUTERS/Issei Kato/File Photo

But Kuroda said there were limits to how much the BOJ could deepen negative interest rates as prolonged ultra-low borrowing costs hurt financial institutions, suggesting that no immediate expansion of stimulus was forthcoming.

As part of efforts to ease the side-effects of its huge asset buying, the BOJ unveiled details of a scheme first flagged in April to lend some of its holdings of exchange-traded funds (ETF).

“It’s true we’ve seen some positive developments regarding overseas risks,” Kuroda said, welcoming receding fears of a disorderly Brexit and recent progress made by Washington and Beijing to de-escalate their bruising trade war.

“Things are moving forward but uncertainty remains high. We still need to guard against downside risks to Japan’s economy,” he told a news conference on Thursday.

Kuroda made the comments after the BOJ’s widely expected decision to maintain its short-term rate target at -0.1% and that for 10-year bond yields around 0%.

The central bank also kept intact its assessment that Japan’s economy continues to expand moderately as a trend, pointing to an expected boost to growth from the government’s $122 billion spending package unveiled on Dec. 5.

But the BOJ offered a gloomier view on factory output, a nod to the fallout from soft global demand and trade tensions.

“Industrial production is falling due mainly to natural disasters,” the BOJ said in a statement, revising down its view from October when it said output was moving sideways.

The decision to stand pat keeps Japan in line with the U.S. Federal Reserve and the European Central Bank, which have both signaled their respective monetary policies will be in a holding pattern for the time being.

“The BOJ will likely stand pat throughout next year given the Fed probably won’t raise or cut interest rates, which should keep yen moves steady,” said Izuru Kato, chief economist at Totan Research.

MINDFUL OF SIDE-EFFECTS

Years of heavy money printing have failed to fire up inflation to the BOJ’s 2% target, forcing it to maintain a massive stimulus despite the hit inflicted on financial institutions’ profits from prolonged ultra-low rates.

Koichi Hamada, a key economic adviser to Prime Minister Shinzo Abe, criticized the BOJ’s negative rate policy and warned against pushing borrowing costs too low.

Kuroda countered the view the BOJ has reached the limits of monetary easing, saying that deepening negative rates was among the central bank’s policy options.

But he said the BOJ must be mindful of the impact ultra-low rates could have on regional banks, already struggling from structural factors and signs of increase in credit costs.

“It’s not as if we can deepen negative rates indefinitely,” Kuroda said. “If low rates are sustained for a prolonged period, that could hurt financial intermediation. We must make sure the (demerits) do not erode the effect of monetary easing.”

He also said Japan’s yield curve ought to steepen more, warning investors against pushing super-long bond yields too low and narrowing the margin commercial banks earn from lending.

Coupled with the rate decision, the BOJ announced details of a plan to begin lending ETFs to market participants as part of efforts to make its policy framework more sustainable.

Aside from gobbling up government bonds to keep bond yields low, the BOJ also buys ETFs and other risky assets under its stimulus program. Some investors have complained the BOJ’s huge buying was distorting stock prices.

Japan’s economy, the world’s third-largest, expanded an annualized 1.8% in the third quarter on resilient domestic demand and business spending.

But factory output suffered its largest fall in two years in October and big manufacturers’ business sentiment sank to a near seven-year low in the fourth quarter.

Analysts expect the economy to have shrunk in the current quarter as a sales tax hike in October cools consumption.

Reporting by Leika Kihara; Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by Sam Holmes and Muralikumar Anantharaman

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