Japan’s Central Bank Splits Over Easing Program

Some on the BOJ’s board think its extensive bond buying needs to be more flexible, adding uncertainty to a radical experiment in monetary stimulus

By Takashi Nakamichi

The Bank of Japan, whose Tokyo headquarters are seen here, is struggling with its long-running drive to spur the economy through monetary easing. Photo: Kim Kyung Hoon/Reuters

The world’s leading experiment in monetary easing is floundering, and its engineers are divided over how to get it on track.

The Bank of Japan 8301 12.79 % has tried radical measures for 3½ years to reflate the country’s sagging economy, resorting this year to negative interest rates. Growth and inflation remain elusive. Now the bank’s board, while still in favor of easing, has some members wanting to revise the methods for doing so—likely sparking uncertainty for economy-watchers and worries for investors.

Japan’s financial regulator, big banks, insurers and advisers to Prime Minister Shinzo Abe have all piled into the fray with policy prescriptions, in a ferment that comes less than a week before the BOJ meets to decide its next move.

“The BOJ’s policy has become a ‘cloudy cocktail’—nontransparent and difficult to understand,” said Nobuyuki Nakahara, a former BOJ board member who advises Mr. Abe.

It is part of a larger unease in the central banking world, where years of easy monetary policy have failed to achieve goals in Europe as well as Japan, and the U.S. Federal Reserve is struggling with how and when to follow through on a long-advertised tightening.

Doubts about where central banks are headed are rippling through global markets, jolting investors who long piled into stocks and bonds as central banks flooded the world with cheap money.

A bond selloff sent yields on longer-term benchmark German and Japanese bonds surging this month, after historic lows earlier this year. The yield on Japan’s 30-year bond nearly hit zero in July but has jumped to about 0.55%. The S&P 500 stock index, which went two months without a 1% move, recently posted three of that size in three trading days.

The suspicion that central-bank firepower is reaching its limits finds support in Japan, where the BOJ has yet to generate steady inflation despite buying nearly $800 billion of bonds annually since late 2014, plus billions of dollars worth of exchange-traded funds. Economic growth is fragile, while the yen has been on a tear—the opposite of what the central bankers wanted and of what Japan’s exporting companies need. Japan’s stock market is down 12.7% this year.

The BOJ is due to publish an assessment of these policies at its meeting next week..

Until recently, Bank of Japan Gov. Haruhiko Kuroda managed to keep a fragile majority on the nine-member board in favor of his preferred easing steps. A decision in January to introduce negative rates on certain commercial-bank deposits passed 5-4. Two of the dissenters later left when their terms expired, replaced by supporters of easing.

That should have given Mr. Kuroda a comfortable majority. But the seven supporters of easing now have fractured over where to go next, say people familiar with their thinking.


At least three in this camp favor sticking with the plan, convinced that both huge government bond purchases and negative rates are still effective in forcing private money to flow into riskier assets.

This faction thinks curbing those purchases, or even tinkering with the buying formula in a way that markets might perceive as tightening, could send the yen soaring, according to people familiar with its views, which is the opposite of the policy’s intended effect. That could hit corporate profits and the stock market.

Others, while still pro-easing, are no longer confident bond purchases can get the job done.

Some including BOJ staff have floated the idea of flexibility in the buying. In place of the current commitment to buy ¥80 trillion of government bonds a year, some in this group have suggested a range, perhaps ¥70 trillion to ¥90 trillion.

The two sides get particularly heated over whether Japan is running out of bonds to buy, according to people familiar with the deliberations. The pro-flexibility faction says the practical limit could come in the next year or two as banks, which often use government bonds as collateral in day-to-day operations, become reluctant to sell more of their holdings to the central bank.

Bank of Japan Gov. Haruhiko Kuroda acknowledged the concerns insurance companies have about the BOJ’s policy of pushing down interest rates in a Sept. 5 speech. Photo: Kiyoshi Ota/Bloomberg News


These board members believe the BOJ should begin looking for policy alternatives, according to people familiar with their thinking, such as introducing a target for long-term interest rates and pledging to buy only the amount of bonds needed to guide rates to that target.

The thought is that such a move—which former Fed Chairman Ben Bernanke has endorsed as an option in certain situations—could reassure people that borrowing costs will stay low while giving the BOJ room to reduce purchases if necessary.

Opposing the idea, one easing proponent said “any grade-school student can tell with a little arithmetic” the BOJ can’t buy bonds forever, “but it’s strange to be deciding policy today based on some future limit when…we haven’t reached that limit.”

The seven pro-easing board members nonetheless agree that lowering interest rates further into negative territory should remain as an option.

They have run into opposition from commercial banks. Banks have had to lower lending rates since the BOJ’s negative-rates policy took effect. They aren’t willing to impose negative rates themselves, on savers, so the result is a narrower spread between their cost of money and what they charge. Some banks also say they see little evidence the BOJ’s negative rates are working as advertised.

“We mainly see loan demand from manufacturers who need money for maintenance of aging machinery, not for new investments,” said Hideaki Furuyama, an executive at San-In Godo Bank Ltd. 8381 -2.03 % in western Japan.

An official at the Financial Services Agency, which regulates banks, said FSA executives have contacted their BOJ counterparts more than once in recent months to express concern about financial institutions’ profits. People familiar with the situation say the FSA put itself forward as a mouthpiece for financial firms’ concerns after a leading banker, Mitsubishi UFJ Financial Group Inc. MTU 0.00 % ’s Nobuyuki Hirano, publicly criticized the BOJ in April.

Life-insurance companies also are struggling when interest rates fall to this extent, said Shuhei Hirano, manager of investment planning at Meiji Yasuda Life Insurance Co.

Mr. Kuroda, the BOJ governor, nodded to these concerns for the first time in a Sept. 5 speech.

He said rates of return on insurance products would likely decline and “affect people’s confidence by causing concerns over the sustainability of the financial function in a broad sense.”

He made clear the bank’s assessment won’t result in open retreat from its 2% inflation goal or its easing program. It could scrap its latest time frame for the goal, which is sometime in the year ending in March 2018, according to people familiar with the situation.

Government officials said they were exploring ways to send a stronger message that the central bank and government are working together to defeat deflation. Prime Minister Abe has put forth a new stimulus package with ¥7 trillion in spending, the first part of which is set to be approved by parliament this fall.

At a bookstore on the 10th floor of the BOJ’s headquarters, a top seller is a work by a former BOJ official, Hideo Hayakawa, comparing advocates of radical easing to Japanese World War II generals who thought they could win just through blind faith and fighting spirit. Three years ago, the store’s top titles featured the views Mr. Hayakawa attacks.

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