The Bank of Japan has begun shifting its focus from supporting growth to ways of phasing out its massive stimulus, taking first tentative steps toward a potentially momentous move for the world economy.
Current and former central bankers familiar with internal discussions say an informal debate is under way on how to prepare for an exit from the bank’s 13-month-old “quantitative and qualitative monetary easing.”
The stimulus is a centerpiece of Japanese Prime Minister Shinzo Abe’s campaign to end two decades of deflation and fitful growth, and Bank of Japan Governor Haruhiko Kuroda has vowed to keep cheap cash flowing until his 2 percent inflation target is in plain sight.
Photo: EPA
However, with inflation now past the halfway mark and signs that the economy has weathered last month’s sales tax increase, Japanese central bankers are already thinking about the next chapter.
First of all, Kuroda and his team are keen to avoid the market confusion and volatility that the US Federal Reserve triggered in May last year when it first signaled the possible “tapering” of its extraordinary stimulus.
With the Bank of Japan churning out ¥60 to ¥70 trillion per year (US$589 to US$687 billion), withdrawal symptoms could be similarly acute and the lesson for the bank is that signaling a tapering too soon or being too specific could backfire.
With that in mind, the bank has no plans to trim the stimulus or publicly suggest the eventual drawdown any time soon, say those familiar with the internal debate.
However, whereas weeks or months ago that debate would center on the potential need for more easing, now there is a strong sense within the bank’s board that the stimulus so far has worked well and the next step, albeit distant, could be policy tightening, not further easing.
Bank of Japan Deputy Governor Kikuo Iwata underscored that shift, reminding markets that the 2 percent inflation goal worked both ways.
Hideo Hayakawa, a former top economist who maintains close contacts with those inside, says the central bank needs to clarify what will it do after the battle with deflation is won.
“If 2 percent inflation comes into sight, the Bank of Japan should taper its asset purchases,” Hayakawa, a senior executive fellow at private think tank Fujitsu Research Institute, told a Reuters Investment Summit last week.
In public, Kuroda has become more vocal about the need for government structural reforms, which shows he wants the central bank to shift from boosting economic demand to playing a supporting role as Abe promises deregulation to boost Japan’s growth potential.
Keen to shore up public confidence in the bank’s inflation goal, Kuroda regularly brushes off questions about an exit strategy saying the focus should remain on battling deflation.
There is no hard deadline for curtailing asset purchases and Kuroda keeps reminding investors that the bank will not hesitate to ease further if economic recovery appears at risk.
However, central bankers are now expressing more confidence in their policy and if the economy keeps improving the debate will intensify about how long the Bank of Japan should maintain its stimulus after it reaches the two-year mark in April next year.
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