Thursday, January 24, 2013

Will the New BOJ Leadership Change Gears on Asset Purchase Program?

The market response—a slight fallback or correction if you will—to the January 22 introduction of the “open-ended asset purchasing method” under the January 22 government-BOJ accord on “Overcoming Deflation and Achieving Sustainable Economic Growth is understandable, given that BOJ’s monthly 13 trillion yen purchases (of which 2 trillion in long-term JGBs and 10 trillion in short-term government securities) in 2014 would increase assets held under the program by a mere 10 trillion yen (a 36 trillion yen increase is in line for 2013) over and above the existing 76 trillion yen ceiling and left open the amount that it would be purchasing if any in 2015 and beyond.

The Abe administration must be disappointed though it is putting a brave face on things, and might want to goose the 2014 numbers and give clearer indications regarding 2015 and beyond when it replaces the two vice governors and Governor Shirakawa in March and April respectively, when their terms expire, with its own men (or, less unlikely, women). It may not be that easy, though.

First, any such decision requires a majority of the BOJ Policy Board, which consists of the governor, the two vice governors, and (currently) six members of the board, all appointed under the DPJ regime and whose terms are staggered to expire two per year in 2015, 2016, and 2017. Two out of the six board members, which the new BOJ will need for a majority, is not an inherently high bar and one of them, Yoshihisa Morimoto, is a former TEPCO executive, so go figure. Still, all the members signed off on the new purchasing method, including most likely the 2014 figures and the wait-and-see attitude for 2015.* Could they turn around in just a few months and say, if you really, really, insist, Governor?
* The publicly available documents do not make the second point clear, but the authorities have confirmed that they are subject to the decision of the board, and the documents do identify dissent where it exists.

Second, and this is where guesswork on the mindset of the Abe administration is required, having the BOJ revise its purchasing plans for 2014 and beyond sends a message that could be interpreted as: 1) the government and the central bank are fully attuned, or 2) the government has the central bank under its control. Is that the kind of ambiguity that it would want, so soon after it has already introduced the accord with much fanfare and defended it against detractors?

My guess is that unless the market outlook darkens significantly from its perspective, the Abe administration is going to allow the dust to settle from the BOJ leadership makeover before making new demands on it and the new governor will feel likewise. However, an inaugural statement that makes it clear that the BOJ will not wait till 2014 but will revisit the issue with alacrity as the situation requires is clearly warranted…and I have been wrong on the BOJ before.

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