Political and economic clouds in America and Asia may ultimately have a silver lining, for the beleaguered American President and Japanese Prime Minister, as they face significant hurdles to their policy making ambitions.
In his first comments since the BOJ zagged by capping rising JGB yields, as the other developed central banks zigged towards scaling back QE, Governor Kuroda signalled his intentions to adhere to the current monetary stimulus. This resolve will be questioned, as will Kuroda’s job security, after the BOJ left policy unchanged and yet lowered its forecast of when it will achieve its inflation target for the sixth time. More significantly, the BOJ also lowered its inflation forecasts. The BOJ’s “Dotplots” are now starting to group and trend lower in a not too dissimilar pattern favoured by some technical analysts. Whilst this can be viewed as signal that monetary policy ultimately needs to be expanded, the process of getting to this expansion will be a painful one for the BOJ since it will have to accept the failure of its current policy stance and the market discounting process associated with this event.
Effectively, the BOJ has admitted that it is underperforming whilst refusing to change its strategy and tactics for the sixth time. How long it can continue to manage expectations in this way without becoming a significant contributor to falling inflation expectations is an important issue. Logic suggests that its current positioning and guidance must be a contributor to falling inflation expectations. As current policy is failing, there is a growing debate about its efficacy and a challenge to continued monetary policy easing.
BOJ board member Yukitoshi Funo initiated the painful process of admission of monetary policy defeat and support for structural economic reform. He began this process with a change in rhetoric to allow the BOJ to pivot away from its current posturing. According to him, the BOJ is no longer…