Bank of Japan Governor Haruhiko Kuroda is running short of time to lay out an exit strategy from the bank's massive stimulus, with just months before the departure of two key board members who want to slow an unsustainable pace of bond purchases.
Takehiro Sato and Takahide Kiuchi have been thorns in Kuroda's side since he launched his radical monetary experiment in 2013, consistently warning of the demerits of the BOJ's huge asset purchases and dissenting to many proposals to ramp up stimulus.
With inflation still stagnant and economic recovery fragile, Kuroda has no plan to tighten monetary policy any time soon.
But he wants to ensure the BOJ's stimulus programme is made sustainable by laying the grounds for a gradual slowdown in its bond purchases, sources familiar with the BOJ's thinking say.
So just when Kuroda could turn to Sato and Kiuchi for help, the two will leave the board with their five-year terms ending in July, narrowing the governor's window of opportunity to lay out plans to slow bond purchases.
"It's true much of what Sato and Kiuchi predicted about the flaws of the BOJ's stimulus became true, and that their views affected the bank's policy framework," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"Whoever replaces them probably won't call for withdrawing stimulus, particularly if there's no jump in inflation. I don't see the BOJ ending its easy policy any time soon."
Rifts in the BOJ's nine-member board add to challenges for Kuroda, who failed to accelerate inflation to his 2 percent target, a year before his own five-year tenure expires next April.
Global bond yield rises, driven by hopes for U.S. President Donald Trump's pro-growth policies, may further complicate the process by emboldening advocates of heavy money printing, including Prime Minister Shinzo Abe. They fear any slowdown of bond buying could push up Japanese borrowing costs.
"Many BOJ officials probably thought they could slow purchases more smoothly. Not quite," said a source familiar with the bank's thinking.
"I think it's proving to be more difficult than what many BOJ officials had thought," another source said. A BOJ spokesman declined to comment.
The BOJ's decision in September to shift to a policy targeting interest rates rather than the size of money printing marked the first step in acknowledging the untenable scale of
the asset-buying programme, the sources said. Under the current framework, the BOJ now guides short-term interest rates at minus 0.1 percent and the 10-year bond yield around zero percent through massive bond purchases.
"The BOJ wouldn't have revamped its framework had it not been aware that its current bond-buying pace is unsustainable," said a third source familiar with its thinking. "It will eventually need to scale back its purchases."
The first key test would be to remove a loose commitment in the BOJ's directive to keep buying bonds at the current pace of roughly 80 trillion yen ($700 billion) per year.
Analysts say the guidance, put in place to appease advocates of heavy money printing in the board, deprives the BOJ freedom to whittle down bond purchases even if it can meet its yield targets with less buying.
Removing the guidance would likely face stiff opposition from two other board members, including one of Kuroda's two deputies, but would fit well with the views of Sato and Kiuchi.
As outliers in a board dominated by proponents of aggressive monetary easing, Sato and Kiuchi have repeatedly warned the BOJ's huge bond buying was distoring markets and unsustainable.
"It's inevitable for the BOJ's bond buying to face difficulties if it keeps purchasing at the current pace," Kiuchi said in a February speech. "The BOJ should have started normalising unconventional policy earlier."
Sato has also argued that monetary policy shouldn't be bound by the 80-trillion-yen figure, and that the BOJ should reduce purchases of short-term debt.
With their departures, analysts say Abe will likely fill the vacancies with those who are more sympathetic to his wish of using monetary tools to cap the cost of funding Japan's huge public debt.
If so, the board will lose a counter-balance to proponents of aggressive easing and leave the fate of any plan to dial back stimulus in the hands of three swing voters.
A board dominated by advocates of big stimulus may also bind Kuroda's hands if global bond yields keep rising and push up Japan's long-term rates. That could force Kuroda to ramp up bond buying, unless he can garner a consensus to raise the BOJ's yield target, the sources say.
"Having a board full of like-minded people won't necessarily help Kuroda," a former BOJ board member said on condition of anonymity. "A balanced board leaves the BOJ more flexibility in guiding policy, but I don't think it will get that."
($1 = 113.8400 yen)