Persuading markets the BOJ won’t pivot is getting harder for its governor

Bank of Japan Gov. Haruhiko Kuroda faces a growing challenge to convince investors that a policy pivot isn’t on the horizon following a wave of hawkish turns by global central bankers.

Kuroda continues to insist that the BOJ’s yield control framework is firmly bolted down, without any tinkering under consideration given continued weakness in Japanese price growth.

Still, the central bank passed on an opportunity to reinforce that message on Wednesday, by sticking to its quarterly buying plan for bonds rather than ramping up purchases to put a lid on yields that set a fresh six-year high earlier in the day.

Inaction for now suggests the BOJ is willing to tolerate yields climbing closer to its upper limit and that it believes the threat of a more powerful fixed-rate operation will keep traders at bay despite their desire to follow a global tide in rising yields.

But the upward market pressure in Japan is also likely to resume and that means sooner or later the bank will have to back up its message with actions instead of words.

“Speculation over possible policy adjustments will only ease once the BOJ jumps in to stop yield rises,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

Kuroda remains the last staunch dove at the world’s biggest central banks outside of China, after European Central Bank chief Christine Lagarde last week swiveled in the direction of tightening policy and Reserve Bank of Australia Gov. Philip Lowe sketched out a scenario hiking interest rates this year as inflation strengthens.

But Kuroda is already in his last full year at the helm of the BOJ, and investors are looking beyond his stimulus-focused stance to a future track toward possible policy normalization.

“The BOJ probably didn’t want to intervene today because it would reinforce the view that the bank is in a completely different camp from the Fed and ECB as they move toward tightening,” said Hideo Kumano, executive chief economist at Dai-Ichi Life Research Institute.

Too much emphasis on the gap in policy stances could further weaken the yen at a time when it’s already exacerbating higher energy costs and import prices for companies and households, he said.

The yield on 10-year sovereign debt touched 0.215% Wednesday morning ahead of the scheduled bond-buying operation. That’s its highest since January 2016 and within sight of the BOJ’s ceiling of around 0.25%.

After the BOJ stuck with its planned purchases of ¥425 billion ($3.7 billion) of bonds in a range from more than five years to 10 years, the long-term yield briefly dropped suggesting that pressure on the central bank to tame upward moves is still not acute enough to warrant action.

Ahead of a long weekend in Japan and inflation data in the U.S., there’s no reason for the BOJ to rush into action with yields still below 0.25%, said Mari Iwashita, chief market economist at Daiwa Securities Co. That turns attention to next Monday, she added.

The BOJ’s stance on normalization has been subject to intense speculation before. In 2018, market chatter about possible policy adjustments rocketed during a previous Federal Reserve tightening cycle. The BOJ defended its yield target range at that time right up to an announcement of adjustments, an about-turn that continues to feed ongoing speculation now.

Higher foreign ownership of Japanese bonds this time around means more of a tussle could lie ahead as the BOJ looks to keep markets in line.

“It’s more difficult for the BOJ now than in the past to prevent Japanese yields from following rising overseas yields, due to foreigners’ increased holdings of yen assets and the higher correlation between local and overseas markets as a result,” said Takahiro Sekido, chief Japan strategist at MUFG Bank Ltd. in Tokyo.

Still, most analysts expect the central bank to resist the temptation to act until it becomes absolutely necessary.

Should markets continue to test the BOJ’s resolve, the bank may go straight to its heavy weaponry in the form of a fixed-rate operation that more clearly marks out its line in the sand for yields.

It could later offer a rate below the current market yield, essentially offering a payout for any bond holder who wants to grab it. While costly for the BOJ, that’s a hugely potent weapon that has worked so far to bring speculators to heel.

At the verbal level, Kuroda already appears to have pulled out all the stops to quash speculation of policy adjustments.

While Kuroda emphasized the proximity of 2% price growth in the first years of his leadership at the BOJ, that signaling has long since turned 180 degrees as the governor now touts distant inflation as a justification for continuing with the BOJ’s stimulus program.

Kuroda ruled out the possibility of looming policy normalization at a news conference in January after the bank forecast price growth of little more than half its 2% target in the years through early 2024.

He even denied the possibility of raising interest rates before stable inflation was attained, going beyond a BOJ policy statement commitment just to increase the monetary base until then.

“There’s a strong belief in the market that the BOJ won’t abandon its 0.25% ceiling without making a formal decision first,” Chotaro Morita, chief rates strategist at SMBC Nikko Securities Inc., wrote in a note, contrasting the BOJ’s stance with the RBA’s abandoning of yield curve control last year.

Still, it’s getting harder for Kuroda to be persuasive on the BOJ’s future policy direction.

“It’s still vivid among investors that Kuroda introduced negative rates a few days after he clearly denied it,” said Hiroshi Shiraishi, a senior economist at BNP Paribas SA, referring to an unpopular surprise the governor pulled in 2016.

“Investors also know it’s hard to flag a shift in the yield curve control well in advance,” Shiraishi said. “Because if you did, it would cause sharp volatility in the market.”