For a central bank that doesn’t want to talk about an exit strategy, the Bank of Japan sure is talking a lot.
The message: When you raise the subject, make sure you say you aren’t even considering discussing the possibility of tightening monetary policy. It’s the unwinding debate that isn’t a debate. In minutes published this week of their June meeting, BoJ officials devoted a meaty paragraph to the dangers of communicating an exit strategy. The public simply won’t understand, they warned, and, in any case, the prospect remains a ways off and circumstances can change. If the bank had to change its narrative later, that would be even worse.
A couple of brave souls disagreed and said “it was important for the bank to thoroughly explain and gain a better understanding among the people of its thinking on monetary policy management.” For their trouble, they earned this retort from a colleague that appears as the document’s last word on the matter: “Even if the bank explained its exit strategy in advance, it was possible that the actual steps of an exit would differ from earlier explanations, as in the case of the Federal Reserve, and therefore careful preparations and thorough explanations were needed in communicating with the market.” Just in case the message somehow wasn’t clear, two new BoJ board members repeated the point in their debut news conference. Nobody at the BoJ is going anywhere near an exit anytime soon, they declared. “Somewhat risky,” said Hitoshi Suzuki, whose five-year term began Monday. So with inflation above zero but well below the BoJ’s 2 percent target, why is this non-discussion even rearing its head? It’s because Japan is really standing alone among its developed-world peers in not even countenancing the concept of exit from ultra-loose monetary policy. The BoJ was first in, a pioneer of quantitative easing.
It looks set to be last out. And it’s starting to feel a bit self-conscious. The Federal Reserve in the United States is pretty well-advanced in removing accommodation, with some officials suggesting there isn’t much work left to do to get to a neutral interest rate – that is, a rate of interest that is neither stimulative nor restrictive of economic life. Don’t let European Central Bank President Mario Draghi’s constant mention of “a very substantial degree of monetary accommodation” mislead you; the ECB will almost certainly begin to taper its quantitative easing program in the next few months. The Bank of Canada has already raised rates and the Bank of England might do so as soon as next month. Japan is hardly a disaster. Its economy has been expanding for five quarters – not an easy feat when a shrinking population means a low potential growth rate – and forecasts last week predicted a few more years of pickup. But the recovery just isn’t translating into large pay gains or a spike in inflation. While prices are no longer declining, the BoJ remains a long way from its target – much further than its peers. That’s not something BoJ officials want to dwell on. Ironically, the BoJ minutes aren’t entirely despairing about wages, which are critical to the notion that inflation will climb, ultimately, to the bank’s target.
Published in Daily Times, July 31st 2017.