Bank of Japan: Steady as She Goes

May 22, 2013

Following a meeting lasting five hours and 28 minutes over two days, the nine-person BOJ Policy Board released a statement that did not break fresh ground.  Radical changes were introduced as a “qualitative and quantitative” sea-change on April 4th at the first meeting of the new leadership team.  This was the second subsequent meeting, and like that on April 26, it didn’t tinker with the broad plan to achieve 2% inflation within two years and to grow the monetary base by 60-70 trillion yen a year through purchases of 50 trillion JGBs a year, 1 trillion of ETFs a year, and 30 billion J-REITs each year.  Commercial paper and corporate bonds will continue to be bought as well until outstandings reach the sums of JPY 2.2 trillion and JPY 3.2 trillion. 

Like the earlier meetings, one of the nine Board members, Takahikde Kiuchi, objected to the promise to maintain quantitative and qualitative easing as long as it is necessary for maintaining a 2% inflation target in a stable manner. A hawkish holdover from the Shirakawa era, Kuichi believes that is too rigid a framework and prefers the wiggle room afforded by language that would commit the Board to “aim to achieve the price stability target of 2% in the medium to long term and designate quantitative and qualitative monetary easing as an intensive measure with a time from of about two years.”  So he would like the current stance to last not more than two years but was outvoted by the other eight Board members.

There was a disquieting aspect to today’s press conference, unlike the two April meetings.  It is the backdrop of a very sharp rise in JGB yields this month, and Governor Kuroda’s inability to make an adjustment to the new situation.  The intermediate monetary policy goal of lower long-term interest rates isn’t happening under the existing policy, so corrections should be made but weren’t.  Kuroda downplayed the risk to ending deflation from the rise in bond yields and attributed their rise to an improved inflation and real growth outlook.  He also said that the situation can be handled operationally by fine-tuning the timing and amounts of daily central bank activities in the market.  All this may be true, but the response resembles a failed style of his predecessors of plowing forward with a “what me worry?” attitude when things don’t go as hoped. 

Monetary policy to be effective needs to be flexible and responsive to unexpected developments and shocks.  The sooner policy response, the easier it usually is to fix a problem.  Put differently, central banks need to stay ahead of the curve, leading markets rather than the reverse.  A doubling of the 10-year JGB yield since early April surely constitutes a change that is not “normal” and therefore ought to be addressed in some concrete manner.

The BOJ statement upgraded its assessment of Japan’s economy to declaring that it has “started picking up.”  Exports are no longer decreasing, and foreign economies are “gradually moving toward a pick-up.”  In April, the Board said the “economy has stopped weakening and has shown some signs of picking up.”  That assessment in turn was an upgrade from March (has stopped weakening), February (appears to have stopped weakening), January (remains relatively weak), and December (has weakened additionally.)

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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