Board reshuffle may complicate BOJ's retreat from radicalism


* Sceptics of massive stimulus leave board in July 23
    * Newcomer Kataoka could deepen rift in BOJ board
    * Advocates of big asset buying to complicate communication

    By Leika KiharaTOKYO, July 18 (Reuters) - A reshuffle in the Bank of
Japan's board will tip its balance more in favour of aggressive
stimulus just as the bank quietly retreats from its radical
monetary experiment, complicating the task of bureaucrats
seeking to whittle down its bond purchases.
    With inflation still well short of the bank's 2 percent
target, the BOJ is nowhere near dialing back stimulus even as
its U.S. and European counterparts eye an exit from ultra-loose
    Given the bank's dwindling policy ammunition, however, many
BOJ bureaucrats want to temper market expectations of additional
easing and - through careful, delicate communication - lay the
grounds for a smooth tapering of asset purchases.
    The task could be made more difficult by a reshuffle in the
BOJ's decision-making policy board this month, when two sceptics
of huge stimulus leave. One vacancy will be filled by a vocal
proponent of huge asset purchases.
    The change comes at a time when the BOJ, having failed to
drive up inflation for years, shifts its focus to target
interest rates instead of the pace of money printing.
    "The impact on monetary policy may not come immediately, but
the board will clearly have more advocates of big asset buying,"
said Hideo Kumano, a former BOJ official who is now chief
economist at Dai-ichi Life Research Institute.
    "That could complicate the BOJ's efforts to educate markets
that its primary focus has become interest rates, not the pace
of asset purchases."
    The addition of Goushi Kataoka, an advocate of massive money
printing, could deepen a rift in the nine-member board.
    Kuroda and a majority in the board believe the BOJ should
allow its bond purchases to fall as long as it can keep yields
capped at its zero percent target.
    But two in the board - Deputy Governor Kikuo Iwata and board
member Yutaka Harada - are opposed to any significant slowdown
in the BOJ's bond purchases.
    Kataoka, who co-wrote a book with Harada, has stressed the
key role big money printing plays in heightening inflation
expectations, suggesting he would fall under the camp of Iwata
and Harada.
    "Full-blown monetary and fiscal policies coupled with a
growth strategy are crucial to break completely out of prolonged
economic stagnation," Kataoka, an economist at Mitsubishi UFJ
Research and Consulting, wrote in a research note in January.
    In September last year, he called on the BOJ to expand
stimulus at an early stage to prop up weak inflation
expectations. The view runs counter to that of most BOJ
policymakers, who prefer to hold off on additional easing given
their dwindling policy ammunition.
    Kataoka declined to comment, when approached by Reuters this
month on whether he maintains these views.

    The other vacancy will be filled by Hitoshi Suzuki, a bank
executive who analysts predict will take a neutral stance on
monetary policy. That would leave the nine-member board with
four swing voters.
    While most of them will likely side with Kuroda, the
increasing presence of those favouring big asset buying could
confuse markets if they openly voice opposition to tapering at a
time the BOJ's main scenario is to gradually slow purchases.
    "At some point, the BOJ probably wants to abandon a pledge
to keep buying bonds at the current pace. That could become
difficult with the new board," said a source familiar with the
bank's thinking.
    The BOJ also loses a counter-balance to Kuroda's radicalism
with the departure of Takehiro Sato and Takahide Kiuchi, who
dissented to most of his monetary-easing steps.
    Sato and Kiuchi were against Kuroda's pledge in 2013 to set
a two-year deadline for hitting his 2 percent inflation target
and voiced doubts that heavy money printing can change the
public's perception that deflation will persist.
    Their views were dismissed until last September, when
stubbornly low inflation forced the BOJ to concede it would take
a long time for inflation to hit its target and that changing
people's perception on future price moves wasn't easy.
    Izuru Kato, a long-time BOJ watcher who is chief economist
at Totan Research, said Kuroda could have avoided such an about
face if he engaged more with the dissenters.
    "Instead of taking into account the views of the dissenters,
Kuroda rejected them," he said. "Now he's paying the price."
    The BOJ is set to cut its inflation forecasts but keep
monetary policy steady at a two-day rate review that ends on
Thursday, which will be the final policy meeting for Sato and
Kiuchi. [nL4N1K41PF]
    The first policy-setting meeting for the newcomers will be
held on Sept. 20-21.
    Having outliers in the board is important as it helps
central banks justify shifting course on monetary policy when
the current approach isn't working, said another source familiar
with the BOJ's thinking.
    "In Japan's case, they could have helped lay the grounds for
a future withdrawal of stimulus."

Central bank balance sheets    http://tmsnrt.rs/2m6cxCc
 (Editing by Lincoln Feast)
 ((leika.kihara@thomsonreuters.com; +813-6441-1828; Reuters
Messaging: leika.kihara.reuters.com@reuters.net))


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