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Analysis: No Plan B in Japanese central bank's new playbook

The Bank of Japan building is pictured in Tokyo, March 29, 2013. REUTERS/Yuya Shino
The Bank of Japan building is pictured in Tokyo, March 29, 2013. REUTERS/Yuya Shino

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan's decision to fire one big shot in its fight to end deflation is a clear signal new Governor Haruhiko Kuroda is not one for constant tinkering with settings, and it will take something big for him to load up his policy cannon again.

The Japanese central bank unleashed the world's most intense burst of monetary stimulus at Kuroda's first rate review on Thursday, promising to inject about $1.4 trillion into the economy in less than two years in a radical gamble that sent the yen reeling and bond yields to record lows.

The BOJ has not ruled out more stimulus should the economy face a severe market shock, such as a sudden yen spike, but the threshold for action has become much higher and any future steps would be within the framework established on Thursday, say officials familiar with its thinking.

"It's a different world from when the BOJ acted bit by bit. It offered all it has on Thursday, so there's no such thing as 'what's next' here," one official said on condition of anonymity as he is not authorized to speak publicly.

While aware of the risk of using all its ammunition at once, the board decided to back Kuroda's "big bang" approach that is based on the belief that when the central bank acts, it must use all its resources to maximize the market impact, the officials say.

That said, central bankers do not yet have a clear strategy on how to respond if a yen spike or a global slump pushed the export-reliant economy back into recession and threatened the goal of getting inflation to 2 percent in two years.

Some market players still expect the central bank to come under pressure for further easing in October, if its quarterly review of its long-term economic and price forecasts shows that 2 percent inflation remains distant.

But the officials said that Kuroda's BOJ no longer sees such quarterly reviews as key triggers for policy action.

FED STYLE

Kuroda made it clear there would be no follow-up stimulus anytime soon, telling reporters on Thursday that the BOJ had taken "all available steps" it could think of.

He also replaced the BOJ's usual line that it would ease again if economic conditions warranted, instead saying the central bank would "make adjustment" to policy as needed -- a sign there would only be tweaks to the new framework, not a series of regular policy changes.

"As for future BOJ policy, the word 'adjustment' says it all," another official said.

Some analysts say Kuroda's approach is similar to that of U.S. Federal Reserve Chairman Ben Bernanke, who would launch a "big bang" stimulus, monitor its effect for at least half a year or so and embark on another big program if the need arises.

The difference is that with Thursday's measures, the BOJ has left itself with very few avenues to boost asset buying.

The BOJ scrapped a limit on the duration of government bonds it targets and will buy 7.5 trillion yen ($78 billion) of bonds per month, roughly 70 percent of bonds sold in markets.

Number-crunching inside the BOJ showed that was the maximum amount the bank thought it could realistically buy, sources said, which means further increases in bond buying are highly unlikely.

The central bank also boosted purchases of exchange-traded funds and real-estate trust funds, and some analysts expect it may opt to boost purchases of such riskier assets if it were to ease again.

With markets for these assets relatively small, however, the BOJ will not be able to achieve the same effect. Loading up on such assets would also expose its balance sheet to bigger losses because their prices tend to be more volatile than bonds.

"The BOJ is essentially pushing investors out of the bond market and forcing them to put their money somewhere else," said Izuru Kato, chief economist at Totan Research in Tokyo.

"It's already heavily distorting markets and that's the cost it decided to pay. What happens next, though? There's really no options left for the BOJ."

(Editing by John Mair)

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