THE END of the easy money era which spanned the global economy for the last decade came into even sharper focus as the Bank of Japan (BoJ) gave fresh insight into when it might slow its stimulus program.
Governor Haruhiko Kuroda’s remarks on Friday that the central bank will start thinking about how to complete its unprecedented easing around the fiscal year starting April 2019 was the clearest signal yet that a conclusion might be in sight to emergency support for the Japanese economy.
While Kuroda’s statement in response to questions from lawmakers was in some ways stating the obvious — the BoJ forecasts inflation to reach its 2% target in fiscal 2019 — the significance is that he’s put down a marker in public that he can be held to.
“It’s notable how over the past few weeks Kuroda has been forced into talking more specifically about the exit,” said Izumi Devalier, head of Japan economics at Bank of America Merrill Lynch. “A year and a half ago he would have shut down the discussion altogether with the blanket ‘it’s too early to talk about it’ statement.”
That means the last of the big central banks is finally thinking out loud about policy normalization or how to begin the process of unwinding years of asset purchases and ultra-low interest rates that were used to stoke growth after the 2008 financial crisis sparked the worst global recession in decades.
The Federal Reserve, Bank of Canada and Bank of England have already raised interest rates and may do so again soon, while the European Central Bank is debating how soon to end its own bond-buying. China’s central bank is sticking to what it describes as neutral policy settings and is ratcheting up money market rates to cool the pace of borrowing. Bloomberg Economics estimates net asset purchases by the main central banks will dwindle to around zero around the start of 2019.
The Bank of Japan under Kuroda has bought hundreds of trillions of yen of assets and pushed interest rates below zero in its efforts to generate inflation of 2%. As part of its program to pull the nation out of years of deflationary malaise, its holdings of Japanese government bonds are almost equal to the annual economic output of Japan, and it also buys exchange-traded funds, corporate bonds and other assets.
“Central banks worldwide are gradually normalizing monetary policy as growth and inflation risks return,” said Chua Hak Bin, a senior economist at Maybank Kim Eng Research in Singapore. “The Bank of Japan is preparing the markets for an eventual exit from its accommodative monetary policy.”
Traders leaped on Kuroda’s remarks. The yen surged while yields on Japanese sovereign debt climbed across the curve after the remarks.
The Nikkei 225 Index closed 2.5% lower on Friday and the Topix Index fell 1.8%.
Such moves suggest just how vigilant investors are to talk of a turn by policy makers. Stocks have fallen and bonds have risen recently amid concern that synchronized global growth, falling unemployment and signs of accelerating inflation would prompt central banks to become more hawkish.
“The market action shows how sensitive investors will be to normalization when it approaches, that even BoJ QE (quantitative easing) will not last forever, and we fear Kuroda may live to regret giving his critics a timeline to measure the BoJ against,” Krishna Guha, vice-chairman of Evercore ISI and a former New York Fed official, said in a note.
Earlier last week, new Fed Chairman Jerome Powell indicated US policy makers may raise rates this year by more than the three times they have been anticipating.
To be sure, Kuroda remains doggedly committed to powerful stimulus until inflation hits 2% and on Friday he, again, ruled out any consideration of an exit before then. Many in the market believe him.
“Hearing Governor Kuroda talk about the policy board debating exit is obviously bracing for markets and underlines the communication challenge the BoJ faces,” said David Fernandez, chief Asia-Pacific economist at Barclays Plc.
“However, he simply said that the exit debate would happen in fiscal 2019 because the policy board forecasts that they will have reached the 2% target by then.” — Bloomberg