What Will the Bank of Japan Think of Next?

BOJ Chief Kuroda all but promised more monetary easing, but what buttons will he push?

By Alex Frangos

For the Bank of Japan, it is no longer if, but how.

Bank of Japan Governor Haruhiko Kuroda all but promised more easing in an interview with The Wall Street Journal Monday, saying, “without hesitation we would adopt additional monetary easing” if deemed necessary.

He most likely deems it very necessary, for two reasons. The first is the yen’s remarkable strengthening in recent months, which has put downward pressure on prices and thrown a major obstacle in front of the BOJ’s 2% inflation target.

The second is the BOJ’s credibility. It is at stake after the central bank’s last surprise move—implementing negative interest rates in January—seemed to backfire, causing the yen to strengthen further. Time may yet prove negative rates effective. But for now, negativity in rates has simply created negativity about central banks in general.

When the BOJ next meets April 28, it will be looking to prove it can still move markets in the right direction. So expect something unexpected—like massive equity purchases. The BOJ already scoops up ¥3 trillion ($27.57 billion) in ETFs each year as part of its broader ¥80 trillion program. HSBC HSBC 2.45 % ’s Izumi Devalier figures that could jump to ¥10 trillion.

The BOJ could also take a cue from the European Central Bank and venture further into corporate bonds.

That doesn’t mean investors should rule out another interest-rate cut. Mr. Kuroda may prefer to wait and see how the first cut plays out rather than double down so quickly, but his penchant for surprise shouldn’t be underestimated. And the initial move into negative rates left room to be much bolder.

One thing Mr. Kuroda seems to have ruled out for now: so-called helicopter money, or direct government debt monetization. Of course Mr. Kuroda declared himself against negative rates, weeks before announcing them.

Alas, perhaps the biggest move to restore confidence is out of the BOJ’s hands: canceling an increase in the value-added tax set to take effect in April 2017. That’s up to Prime Minister Shinzo Abe.

There are inklings the prime minister may acquiesce. But unless the tax is shelved, any further BOJ easing may face another weak reception.

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