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The Bank of Japan frustrated with stubborn low inflation is actively looking to revamp policy before it's July meeting Reuters is reporting sources saying. Changes to its interest-rate targets and stock-buying techniques are on the table.

BOJ kuroda

The changes will be dependant on new inflation forecasts from policy board members sources say. It is no secret policymakers are already debating changes to Governor Haruhiko Kuroda’s massive easing program, which for all their sheer size has failed to to bring decisive shifts from a deflationary trend. While the Japanese economy today has changed considerably since BOJ Governor Mr. Kuroda took over  in 2013 with his central role in Prime Minister Shinzo Abe’s revival plan the QE experiment has failed to ignite Japan. To be fair though growth has continued for the past eight quarters, the longest streak in 28 years; the Nikkei Stock Average has risen more than 70% during his term; and, the job market is tight.

Inflation is rising gradually toward the Bank of Japan's 2% target, credited to the BOJ’s core policy of keeping interest rates low and even negative while flooding the banking system with cash by buying government bonds and stocks. The reality is the sheer flood of money and credit has not got the results hoped for though a new batch of analysts have short memories so it appears otherwise. Should the next inflation report fail again many BOJ officials are wary of again ramping up stimulus and have publicly warned of the rising cost of prolonged easing. The most evident is the strain on bank profits.

Profits at Japan’s roughly 100 regional banks are being squeezed by the BOJ’s ultra-loose policy. More than half the regional banks lost money on their core lending and fees businesses in the year to March 2017. Concerns have also grown over the BOJ’s commitment to buy 6 trillion yen ($54 billion) worth of ETFs per year, which has reduced floating shares in the market and put the bank on track to become a top shareholder of big Japanese companies. Reuters said

With all that Koruda has yet to achieve the one goal he advertised most loudly at the start of his term: 2% inflation. Core inflation is still less than 1%. Mr. Kuroda has repeatedly told Parliament, using the same language, that he will “persistently continue current powerful monetary easing.”

What the BOJ comes up with investors will be watching. The BOJ may discuss tweaking how  it buys JGBs and ETFs to mitigate market distortions with sources saying any change would be signalled as a step for policy sustainability, not tightening.  The aim is to make massive stimulus program more sustainable. Sounds like nothing new but perhaps a sign the bankers are worried about other factors too such as the trade war instiagted by the U.S. 

The Federal Reserve has been raising rates since December 2015, and the European Central Bank has cut back its government-bond buying. This week,we saw Japanese companies raise overall wages by about 3% in line with a request by Mr. Abe. Though like everything in Japan the figures aren't what they seem. The raises were inflated by temporary bonuses and regular seniority pay increases.

SMBC Nikko Securities chief economist Yoshimasa Maruyama in a note back in March estimated the gains in base pay would remain about 0.9%. Inflation excluding fresh food and energy prices “is unlikely to rise stably above 1% when base salaries rise less than 1%,” said Mr. Maruyama. “It will likely make it difficult for the BOJ to conclude that price growth is moving smoothly toward its 2% goal.”

From The Traders Community News Desk

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