Kuroda of BOJ dismisses the near-term possibility of leaving easy policy after shock move

By Leika Kihara

TOKYO (Reuters), -Bank of Japan Governor Haruhiko Kuroda dismissed Monday the possibility of a near term exit from ultra-loose monetary policies. However, markets and policymakers are focusing more on what happens after Kuroda’s tenure is over.

Investors continue to push up Japanese government bond yields (JGB), based on the expectation that the BOJ will eliminate its yield control in April next year under a new governor.

Fumio Kinshida, Prime Minister, made clear Monday that Japan’s ten-year-old blueprint for beating inflation will be reviewed after a new BOJ governor has been appointed.

Kishida, speaking at a seminar, said that it was something to be done after the new BOJ governor has been elected. He spoke about possible changes that the government could seek to the BOJ’s joint statement which commits central banks to achieving a 2% inflation target by the earliest time possible.

Markets were shocked last week by the BOJ’s surprise increase in the allowance band for its 10-year JGB target. It was an attempt to lower the cost of extended stimulus.

Kuroda claimed Monday that Kuroda’s last week decision was meant to boost the effects of its ultraeasy policy and not as a first step towards removing its massive stimulus programme.

This is not a step towards an exit. Kuroda spoke to Keidanren, the Japanese business lobby, and stated that the Bank will strive to achieve the price goal in a sustainable way.

Kuroda however stated that wage growth will likely increase slowly because of the intensifying labour shortages in Japan, and structural changes to Japan’s work market. This is leading to higher wages for temporary workers and an increase in permanent workers.

Kuroda stated that Japan’s labor market conditions are expected to tighten and that firms’ wage- and price-setting behavior will likely change.

He said that Japan was nearing a crucial juncture for breaking out from a long period of low inflation, low growth.

The BOJ’s ability to grow wages is key to when it could increase its yield curve control (YCC). These targets are set at -0.1% short-term interest rates, and around 0% 10-year bond yield.

The BOJ’s constant bond buying to defend its yield cap has been criticized more for distorting the market pricing and causing a yen drop that increased the cost of import already expensive raw materials.

Sources tell Reuters that Kishida’s administration may revise next year the joint Statement that focuses upon steps to beat inflation. This goal has been out-of-step with recent increases in inflation and has prevented BOJ from adjusting monetary policies more flexible.

Analysts believe that any such revision would increase the likelihood of the BOJ adjusting its ultra-low interest rate.

The JGB yield on two-years rose briefly to 0.225% Monday on the back of expectations for a short-term rate rise. The 10-year JGB yield climbed to 0.445% on Monday, just below the 0.5% upper limit.

Kishida gave few clues about his selection for the next BOJ governor. He stated only that the person he would choose to be the “most appropriate” candidate at the time.

(Reporting by Leika Khara; Additional reporting from Tetsushi Kajmoto and Kentaro Shigyama; Editing done by Edmund Klamann