ECB chief Draghi's lesson for Bank of Japan's Kuroda: Loose lips sink policy ships

Governor of the Bank of Japan (BOJ) Haruhiko Kuroda speaks at the Yomiuri International Economic Society meeting in Tokyo, Japan, on March 7, 2016.
Governor of the Bank of Japan (BOJ) Haruhiko Kuroda speaks at the Yomiuri International Economic Society meeting in Tokyo, Japan, on March 7, 2016.PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - Mario Draghi provided a useful lesson last week to his Japanese counterpart Haruhiko Kuroda: how you communicate your policy may be at least as important as the actions you take.

After the European Central Bank on March 10 unveiled a more aggressive dose of monetary stimulus than many analysts had anticipated, financial markets registered disappointment nevertheless. ECB President Draghi triggered a reversal in the euro's decline, and a slide in European stocks, by saying at a press conference that further rate cuts may not be needed.

Given the role of a weaker exchange rate in stoking record Japanese corporate earnings, and a rising stock market in helping to kindle confidence in the long-stagnant economy's prospects, the reaction of financial markets poses a sensitive issue for the Bank of Japan.

BOJ Governor Kuroda, who led a divided board to follow the ECB in adopting negative interest rates on Jan. 29, has already experienced market disappointment, and the Draghi episode will have underscored what's at stake for him this week.

The BOJ added negative rates to its record asset-purchase program in an effort to stoke lending and give a fresh jolt to an economy that continues to stutter. After falling into a recession in mid-2014, data last Tuesday confirmed Japan's gross domestic product shrank an annualized 1.1 per cent in the final three months of 2015.

Instead of applauding the BOJ move, Japanese lawmakers and part of the public has responded with concern. Mr Kuroda has been called almost daily to answer questions at the parliament in recent weeks.

"There are lots of concerns among households and businesses about negative rates," said Kohei Iwahara, the Tokyo-based director of economic research at Natixis SA. "To put it simply, it is quite unpopular here."

Deputy Governor Hiroshi Nakaso said on March 3 that markets need time to digest the implementation of a negative rate on a portion of the cash that commercial banks park at the BOJ, which became effective in mid-February. Only five of 40 economists surveyed by Bloomberg expect additional stimulus at the BOJ meeting that ends on March 15.

Even so, now that the BOJ has adopted a negative rate, there may be little option but to take it lower than the initial 0.1 per cent, or risk being seen as admitting that the move failed. Eighty per cent of analysts see a further reduction as the most likely next step to expand stimulus. Almost 90 per cent see more easing coming by the end of July.

"Compared to Draghi, Kuroda has the advantage of fairly low expectations for action at this week's meeting," said Sean Callow, a senior foreign-exchange strategist in Sydney at Westpac Banking Corp. "But he is likely to have paid attention to the market's reversal on Draghi's comments on how far negative rates could go. He should re-emphasize the existing commitment to cut the interest rate further into negative territory if judged as necessary."