(Reuters) - Prime Minister Shinzo Abe's expected decision to delay a tax hike compounds problems for Bank of Japan Governor Haruhiko Kuroda, who already faces an increasingly divided board and financial markets that are questioning his credibility.
As expectations grow that Abe will soon decide to delay a planned increase in the sales tax, BOJ policymakers worry that foot-dragging on fiscal reform could shake market confidence that the government is committed to fixing its tattered finances, say sources familiar with the bank's thinking.
Kuroda's credibility is also at stake, since he pushed through an expansion of his "quantitative and qualitative easing" (QQE) program last month only by breaking a 4-4 tie on the board.
If he chooses to ease again, he could struggle to persuade divided members. And, when he eventually seeks an exit from ultra-loose policy, he could fail to win the confidence of the debt market to replace the BOJ as buyer of first resort, analysts say.
"A delay in the tax hike will be a disappointment for the BOJ because part of the reason it eased policy last month was to support the economy and nudge Abe into raising the tax next year," said Izuru Kato, chief economist at Totan Research and a prominent BOJ watcher.
"But you could say it's a consequence of the BOJ's stimulus. By buying government bonds in huge amounts and keeping yields very low, the BOJ is allowing politicians to avoid painful fiscal reform."
Just two weeks ago, Kuroda surprised investors for the second time in 18 months with bold monetary easing that pushed the yen to seven-year lows and Tokyo stocks to seven-year highs.
Some traders say they no longer trust Kuroda, who until just before the Oct. 31 decision was speaking confidently about prospects that economic growth and inflation would accelerate.
"Up until a day before the easing, they have been saying that the economy is doing well," said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp.
"The lesson from the BOJ's latest easing is that you have to take what they say with a grain of salt."
The BOJ is set to keep monetary settings unchanged at a policy meeting on Tuesday and Wednesday, which will come just as Abe is expected to announce a delay in raising the tax to 10 percent from 8 percent next October.
MARKET BACKLASH A CONCERN
The first increase in the two-stage tax plan came in April, and dealt a heavier blow to the fragile economy than expected.
Still, Kuroda has urged the government to proceed with the second tax hike, warning that postponing it holds a small but dangerous risk of triggering a spike in bond yields that would be hard to contain even with the BOJ's massive bond purchases.
Many central bankers are thus perplexed at reports that Abe may delay the second tax hike and call a snap general election.
"The BOJ's growth forecasts are based on the assumption that the tax hike goes ahead," said one source familiar with its thinking.
"They would have to be changed if the tax hike is delayed," which could complicate policy-making, he added. Under its massive asset buying plan, the BOJ now gobbles up almost the same amount of JGBs which are issued each month, a move critics describe as tantamount to debt monetization.
While BOJ officials have refrained from weighing into the tax hike debate, they worry that delaying the tax hike may further strengthen the impression the BOJ is bank-rolling the government's huge debt.
Such concerns may be discussed at next week's rate review, with some in the board already wary about the radical nature of QQE enough to dissent to last month's easing, analysts say.
Board member Ryuzo Miyao on Wednesday voiced "strong hope" the government abides by a commitment it made to the BOJ to steadily implement fiscal reform.
Another board member, former market economist Takehiro Sato, warned that maintaining fiscal discipline was crucial if Japan is to keep investors on its side.
reuters.com
As expectations grow that Abe will soon decide to delay a planned increase in the sales tax, BOJ policymakers worry that foot-dragging on fiscal reform could shake market confidence that the government is committed to fixing its tattered finances, say sources familiar with the bank's thinking.
Kuroda's credibility is also at stake, since he pushed through an expansion of his "quantitative and qualitative easing" (QQE) program last month only by breaking a 4-4 tie on the board.
If he chooses to ease again, he could struggle to persuade divided members. And, when he eventually seeks an exit from ultra-loose policy, he could fail to win the confidence of the debt market to replace the BOJ as buyer of first resort, analysts say.
"A delay in the tax hike will be a disappointment for the BOJ because part of the reason it eased policy last month was to support the economy and nudge Abe into raising the tax next year," said Izuru Kato, chief economist at Totan Research and a prominent BOJ watcher.
"But you could say it's a consequence of the BOJ's stimulus. By buying government bonds in huge amounts and keeping yields very low, the BOJ is allowing politicians to avoid painful fiscal reform."
Just two weeks ago, Kuroda surprised investors for the second time in 18 months with bold monetary easing that pushed the yen to seven-year lows and Tokyo stocks to seven-year highs.
Some traders say they no longer trust Kuroda, who until just before the Oct. 31 decision was speaking confidently about prospects that economic growth and inflation would accelerate.
"Up until a day before the easing, they have been saying that the economy is doing well," said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp.
"The lesson from the BOJ's latest easing is that you have to take what they say with a grain of salt."
The BOJ is set to keep monetary settings unchanged at a policy meeting on Tuesday and Wednesday, which will come just as Abe is expected to announce a delay in raising the tax to 10 percent from 8 percent next October.
MARKET BACKLASH A CONCERN
The first increase in the two-stage tax plan came in April, and dealt a heavier blow to the fragile economy than expected.
Still, Kuroda has urged the government to proceed with the second tax hike, warning that postponing it holds a small but dangerous risk of triggering a spike in bond yields that would be hard to contain even with the BOJ's massive bond purchases.
Many central bankers are thus perplexed at reports that Abe may delay the second tax hike and call a snap general election.
"The BOJ's growth forecasts are based on the assumption that the tax hike goes ahead," said one source familiar with its thinking.
"They would have to be changed if the tax hike is delayed," which could complicate policy-making, he added. Under its massive asset buying plan, the BOJ now gobbles up almost the same amount of JGBs which are issued each month, a move critics describe as tantamount to debt monetization.
While BOJ officials have refrained from weighing into the tax hike debate, they worry that delaying the tax hike may further strengthen the impression the BOJ is bank-rolling the government's huge debt.
Such concerns may be discussed at next week's rate review, with some in the board already wary about the radical nature of QQE enough to dissent to last month's easing, analysts say.
Board member Ryuzo Miyao on Wednesday voiced "strong hope" the government abides by a commitment it made to the BOJ to steadily implement fiscal reform.
Another board member, former market economist Takehiro Sato, warned that maintaining fiscal discipline was crucial if Japan is to keep investors on its side.
reuters.com
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