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 Concerns that a fresh burst of stimulus would be wasted on
households and businesses so far unconvinced by the bank's foray
into negative rates, on top of huge money printing, were among the
key factors behind last week's decision to hold off from further
easing, according to sources familiar with BOJ thinking.
"There's a sense of anxiety spreading in the public about the fact
the BOJ is implementing these abnormal policies," said one of the
sources. "That may be behind a lack of public support behind more
BOJ stimulus."
Kuroda stressed that he would deploy all available policy means if
the BOJ were to act again, suggesting that any further easing would
take the form of another "big bang" measure chosen for its
psychological impact on the public, analysts said.
But the decision to hold fire - and the market reaction that drove
the yen to an 18-month high - has strengthened the voices of
skeptics who argue the BOJ's experiment has run its course.
At Thursday's rate review, the BOJ pushed back the timing for
hitting its 2 percent inflation target for the fourth time in the
past year, as weak exports and consumption hurt growth, giving
Kuroda good reason to pull the trigger.
Markets were also pricing in the prospect of further easing, which
meant Kuroda risked another bout of unwelcome yen rises and stock
price falls by standing pat - which is exactly what happened. [MKTS/GLOB]
But households and companies, still confused about how the central
bank's decision to adopt negative interest rates could help the
economy, were in no mood to welcome another round of stimulus just
yet, said the sources familiar with BOJ thinking.
That meant using its diminishing policy ammunition now did not make
much sense given its likely limited impact on household sentiment,
which holds the key to the success of Kuroda's massive stimulus
program, the sources said.
WAR OF ATTRITION
Deflation is seen as the root of two decades of economic malaise in
Japan, where expectations that prices will fall have discouraged
consumers from spending big and so depressed growth since the 1990s.
The BOJ stunned markets in January when it added negative rates to
its massive asset-buying program, dubbed "quantitative and
qualitative easing" (QQE), aimed at jolting the economy out of its
spiral of falling prices and low growth.
The measures are aimed at pushing down real borrowing costs and
heightening public expectations that prices will rise in the months
ahead, encouraging companies and households to spend now rather than
save.
But there have been scant signs of success.
Households' inflation expectations fell in March to levels last seen
before the BOJ unleashed QQE three years ago, while most firms
polled by Reuters did not favor negative rates.
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A BOJ survey in March showed that 83.9 percent of households felt
price rises were undesirable, up from 82.4 percent three months ago,
underscoring the challenges of eradicating the sticky deflationary
mindset besetting consumers.
Despite the yen's ascent, lawmakers and business lobbies have
refrained from calling for more BOJ action, with some even saying
that the costs of more easing may outweigh the benefits.
Kuroda told reporters on Thursday that the positive effects of
January's easing on the economy should appear in no more than six
months, suggesting that the BOJ may consider easing later this year
if inflation fails to pick up.
BOJ officials hope that Japan's recovery prospects will improve
around mid-year. They say the key would be whether services prices
picked up in the April-June start of the new fiscal year, which
would suggest that companies were steadily passing on rising labor
costs to consumers.
But many analysts expect the BOJ to slash its inflation forecast
again at the next quarterly review in July, as soft global demand
and the yen's renewed spike hurt companies' profits and discourage
them from raising wages.
Some also warn that expanding stimulus under the current framework -
which appears to be Kuroda's plan for now - may prove ineffective in
changing public perceptions of price moves.
"The BOJ's initial strategy was to shock people's mindset out of
deflation. Such shock therapy works only as a short-term strategy,"
said Izuru Kato, chief economist at Totan Research and a prominent
BOJ-watcher.
"Three years have passed since the BOJ adopted QQE and, in reality,
it's now fighting a war of attrition. If so, I wonder whether
sticking to the same 'shock' strategy would work."
(Reporting by Leika Kihara; Editing by Alex Richardson)
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