‘BOJ will consider buying derivatives’

Bank of Japan governor nominee Haruhiko Kuroda said that the central bank will consider buying derivatives if he’s confirmed as governor and signaled a readiness for a quick expansion in monetary stimulus.

“We will carefully consider such a proposal,” Kuroda, the Asian Development Bank chief, said in response to a lawmaker’s question in his second Diet confirmation hearing Monday. “There are opinions on whether it is a good or bad idea to enter the derivatives market to buy assets such as swaps,” Kuroda said, adding that the BOJ’s current scale of asset buying is “not a strong enough commitment.” 

Extra stimulus may come as soon as the BOJ’s next policy board meeting on April 3-4, according to Nomura Holdings Inc. and Mizuho Securities Co., assuming Kuroda can persuade existing members of the board that immediate action is required. He has already identified at least one ally, after board member Sayuri Shirai last week proposed bringing forward open-ended asset purchases scheduled for 2014.

“This is a communications strategy, rather than an actual policy at this moment,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “It’s understandable that Kuroda wants to impress the markets. Any type of asset, including derivatives such as interest rate swaps, should be on the table.”

Kuroda said in an interview last month that the BOJ could purchase the equivalent of trillions of dollars of assets to expand its balance sheet.

Whether such a policy could be adopted by the central bank is “not just an issue of persuading other BOJ board members, but also the technicalities in the market,” said JPMorgan’s Adachi. “If the market is very small and the intervention by the BOJ is significant enough to collapse the market, then perhaps even Kuroda will think it’s not a good idea.”

Kuroda may have been to referring asset-backed securities and index funds, said Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong.

Any such purchases would likely “be small, since increasing the amount of risk assets can potentially threaten the bank’s capital base,” Devalier said. “At the very least a loss-sharing accord with the government is probably a pre-requisite for such a move.”

The BOJ board voted eight-to-one against the proposal by Shirai on March 7, in Governor Masaaki Shirakawa’s final meeting before a new leadership takes over. Shirakawa steps down with his two deputies on March 19.

Kuroda has said that the BOJ will do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could start sooner than next year. He has also pledged to consider buying longer-term debt.

Board member Koji Ishida said in a speech Monday that a “sustainable fiscal structure” is important for expanded monetary easing, warning that yields on government bonds could rise if trust in fiscal discipline is lost.

Benchmark 10-year bond yields reached an almost decade low of 0.585 percent on March 5 and finished last week at 0.65 percent. The yield was at 0.66 percent as of 11:32 a.m. in Tokyo.

The yen fell 0.2 percent to 96.18 per dollar, extending its more than 16 percent fall since mid-November, while the Nikkei 225 Stock Average was 0.9 percent higher. 

(Bloomberg)