OITA/TOKYO, JAPAN — The Bank of Japan (BoJ) ramped up efforts to dispel market speculation of an early withdrawal of its massive stimulus, boosting its bond buying plan on Wednesday and reassuring markets that monetary policy will remain ultra-loose given meager inflation.

BoJ Deputy Governor Kikuo Iwata said on Wednesday the central bank must maintain its “powerful” monetary easing with inflation still distant from its 2% target.

“The economy is expanding moderately but prices remain weak. There’s some distance to 2% inflation,” Iwata said in a speech to business leaders in Oita, southern Japan.

A summary of BoJ policy makers’ opinions, released on Wednesday, quoted one of them as saying at January’s rate review that a rise in market expectations for an imminent departure from monetary easing would be “undesirable.”

This cautious view of the inflation outlook came despite signs of economic strength, with data out on Wednesday showing factory output grew in December at the fastest pace in eight months on robust global demand for Japanese goods.

“As the global economy is gathering momentum, exports are rising, helping output stay in an uptrend,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Subdued inflation and the strengthening economy pose a dilemma for the BoJ, which is forced to maintain its radical stimulus program despite side-effects such as the drag on bank profits from ultra-low borrowing rates.

Signaling its resolve to keep rising global bond yields from pushing up Japanese yields, the BoJ on Wednesday increased the amount of Japanese government bonds (JGB) with three to five years to maturity it will buy in regular market operations.

The BoJ’s announcement pushed the dollar up to an intraday high of 109.095 yen, though it later pulled back below 109 yen. The 10-year JGB futures price ticked up to 150.26 from around 150.20 following the announcement.

IWATA’S TERM COMING TO AN END
Governor Haruhiko Kuroda has struggled to tame market speculation that the BoJ may follow in the footsteps of US and European peers in heading for an exit from crisis-mode policy, fueled in part by Japan’s brightening recovery prospects.

Complicating Kuroda’s task is a growing chorus of policy makers on the BoJ’s nine-member board looking at an exit from ultra-accommodative policy, the summary of debate at January’s rate review showed.

“If the economy and prices continue to improve, the BoJ may need to consider adjusting its yield targets to make its policy framework more sustainable,” one board member said, foreshadowing an anticipated rise in rates.

Even Iwata, a vocal advocate of aggressive easing, said BoJ efforts alone won’t be enough to hit 2% inflation and urged the government to remove barriers that hamper competition.

“Government steps, as well as appropriate monetary policy, are necessary to achieve price stability with sustained economic growth,” said Iwata, whose five-year term ends in March.

These remarks run counter to Iwata’s earlier view that central banks are primarily responsible for accelerating inflation and can do so as long as they print money fast enough.

Iwata is seen as an architect of the BoJ’s huge asset-buying program, dubbed “quantitative and qualitative easing” that aimed to shock the public out of a deflationary mind-set.

The departure of Iwata, who said he was “quite sure” he wouldn’t be reappointed, would symbolize an end to the BoJ’s radical monetary experiment.

Iwata’s exit could also raise the odds of BoJ dropping its loose pledge to buy bonds at a pace that increases its holdings by 80 trillion yen ($735 billion) per year, an assurance made obsolete by the pace already slowing to almost half that level, some analysts say. — Reuters

TRADERS in India’s battered bond market want the central bank to play the role of a savior.

With the market reeling under the worst sell-off in almost two decades, investors say the Reserve Bank of India (RBI) should consider buying support as well as expand the quota limits for global funds. Absent that, they expect the declines to continue.

“To calm the bond market, the supply-demand maths has to fit in; meaning keep fiscal deficit in check and/or find additional demand levers by increasing limits for foreigners or the RBI doing bond purchases,” said Mumbai-based Lakshmi Iyer, the chief investment officer for debt at Kotak Mahindra Asset Management Co., which oversees $19 billion in assets.

The nation’s sovereign bonds are set to decline for the sixth straight month in January, the longest stretch since 2000, amid elevated oil prices and hardening global yields. The yield is seen climbing as high as 8% in the fiscal year starting April 1, a level last seen in 2014, according to ICICI Securities Primary Dealership Ltd. The yield fell one basis point Wednesday to 7.42% as of 9:40 a.m. in Mumbai.

Allowing foreigners to buy more government debt will help absorb a  record supply of bonds, which along with worries over accelerating inflation and wider deficits has spooked the market. Global funds bought 1.4 trillion rupees ($22 billion) of bonds in 2017, the most in four years, and the central bank has said it would raise the cap on overseas investors to 5% of outstanding bonds by March 2018.

Bond purchases will help comfort the market, Bank of America Merrill Lynch said in a note, forecasting $25 billion of such operations in the year starting April 1. It’s not the first time the central bank would have bought debt. In the year ended March 2017, the RBI injected 1.1 trillion rupees in liquidity, helping push down the yield to more than a seven-year low even as the government sold a record amount of debt.

Open market operation purchases “would be the strongest signal” to allay concerns about the spike in yields, Indranil Sen Gupta, BofAML’s India economist wrote in the note.

The rout may lead to 155 billion rupees of mark-to-market losses on the available-for-sale portion of the banks’ investment portfolios in the December quarter, according to ICRA Ltd., a unit of Moody’s Investors Service. The declines prompted state-run lenders to ask the RBI to allow them to spread the losses over two quarters, the Economic Times reported earlier this month. — Bloomberg