NEW YORK - Japan may be just posing as an outlier.
Yes, the Bank of Japan renewed its commitment to ultra-low interest rates just as other developed economies were moving toward further rate increases and an end to stimulus. But beneath the headlines about the BOJ’s pledge to keep printing money for an “extended period,” Gov. Haruhiko Kuroda and his colleagues left clues to what higher rates might look like in Japan. They aren’t ready to walk through that door, but the keys are on the table.
Under the changes unveiled last week, the yield on the benchmark 10-year Japanese government bond will be allowed to move as much as 0.2 percent above or below the target of zero. Doesn’t sound like much, but investors behaved like it was a significant change. The BOJ jumped into the market to calm things after yields surged to an 18-month high. That was a surprise, given the yield touched 0.145 percent, well within the new parameters. If traders believed the “extended period” dovish narrative, the intervention to suppress yields wouldn’t be needed. Deputy Gov. Masayoshi Amamiya told reporters on Aug. 2 that rapid moves won’t be tolerated.
Amamiya, who wields enormous power behind the scenes, had more to reveal. He went on to suggest that the BOJ Policy Board wasn’t completely of one mind. “Between the board members there were nuanced differences in their views on how much the yield could go up or down,” Amamiya said. Minutes of the meeting show one board member sought a band of 0.25 percent either side of zero while another person said forward guidance ought to stimulate expectations of inflation so monetary easing won’t be prolonged. (That horse has bolted!)
Other chips in the uber-dovish wall: Amamiya intimated there may not be a lot of conviction around the BOJ’s ¥6 trillion annual target for purchases of exchange-traded funds. As Bloomberg’s Yuko Takeo wrote, that had echoes with the bank’s target for purchases of JGBs. The BOJ has a goal of buying ¥80 trillion a year. In practice, the bank is buying at about half that pace, hence the term “stealth tapering.” Officials also took steps last week to reduce side effects on some banks of negative interest rates.
Nobody doubts that the BOJ intends to keep policy much looser than elsewhere in the Group of Seven. That’s demanded by failure to reach the 2 percent inflation target and forecasts showing it will take even longer than previously thought to reach. That doesn’t mean everything is static in Japanese policymaking.
Reuters reported that the BOJ had plans to raise rates twice this year that were scuttled by slowness to meet the inflation target. What was ultimately announced on July 31 was a compromise, brokered by Amamiya, between rival camps — one bloc eager to begin unwinding stimulus and another more dovish.
One week on, Japan looks like it’s in a kind of messy limbo. Perhaps the real standout among major central banks isn’t Japan, but China, a point made by Stephen Jen and Joana Freire of Eurizon SLJ Capital. The People’s Bank of China has taken a number of steps to ease some of the pain of debt reduction and trade conflict. It’s not an outright easing (yet), but you can discern the tilt of policy.
Japan did a great sales job by introducing the “extended period” forward guidance. People who expected the BOJ to turn toward cutting stimulus and raising rates should just wait. Step by step, they may be proven right.
Daniel Moss writes on economics for Bloomberg. Previously he was executive editor of Bloomberg News for global economics.