The Bank of Japan is now talking about a potential exit strategy.
The Bank of Japan has begun shifting its focus from supporting growth to ways of phasing out its massive stimulus, taking first tentative steps towards a potentially momentous move for the world economy.
Current and former central bankers familiar with internal discussions say an informal debate is under way on how to prepare for an exit from the BOJ's 13-month-old "quantitative and qualitative monetary easing."
The stimulus is a centerpiece of Prime Minister Shinzo Abe's campaign to end two decades of deflation and fitful growth, and BOJ Governor Haruhiko Kuroda has vowed to keep cheap cash flowing until his 2 percent inflation target is in plain sight.
The above information is of major import to the globe. Previously we’ve commented that, from a monetary standpoint, the world can be seen as a giant see-saw with the Fed on one end (in tightening mode) and the ECB on the other end (pushing to start QE). Up until this week, the Bank of Japan was in the middle.
It is now moving towards the Fed’s side of the seesaw.
This is a tectonic shift. we’ve noted before on these pages how the Bank of Japan is “ground zero” for the Keynesian lunacy that dominates Central Bank thinking. That thinking, in its simplest form, believes that “printing money will generate growth.”
Japan has now found this belief to be false. As noted before, Japan’s $1.4 trillion QE program, announced April 2013, was the single largest monetary program in modern history: a Central Bank announcing it would print an amount of money equal to over 24% of the country’s GDP.
Since announcing this program, Japan has seen only two quarters of accelerated GDP growth… hardly cause for celebration. Many commentators are claiming Japan has grown more than this due to the rapid growth in the first quarter of 2014. However, this growth was largely due to companies and consumers going on a spending spree before Japan instituted a sales tax increase on April 1.
The one thing this program did accomplish was a serious devaluation of the Japanese Yen. Between Japanese Prime Minister Shinzo Abe’s verbal interventions and the Bank of Japan’s QE policy, the Yen has lost 25% of its value since mid-2012.
This devaluation was intended to boost Japanese exports. The only problem is that it’s also unleashed inflation. In some ways, this was the intended goal (both Shinzo Abe and the Bank of Japan are targeting 2% inflation). However, inflation, once unleashed, can rapidly become a real problem.
On that note, Japan’s official inflation data is already at 1.3%. However, this excludes fresh food. And Japan’s Corporate Service Price Index rose 3.4% in April, well above the expected 3.2%. Inflation is seeping into Japan’s economy.
Indeed, the Bank of Japan’s Board is now showing increasing dissent.
Three of the Bank of Japan's nine board members wanted to separately revise growth and inflation outlooks, including emphasizing downside risks and setting a timeframe for easing, minutes of the April 30 policy meeting released Monday showed.
Bank of Japan minutes show varied dissent on 2% inflation target, growth BoJ minutes show dissent… Takahide Kiuchi and Takehiro Sato repeated objections to the outlook that inflation will be raised to and anchored around 2% in 2015.
Sato said that inflation "is likely to follow a rising trend again from the second half of this fiscal year."
Weak GDP growth with major currency devaluation? This is called stagflation. And it’s causing the Bank of Japan some doubt.
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