Japan Doesn't Have Easy Money, But It Needs It

Sometimes you can only shake your head at the confusion surrounding monetary policy.

The BOJ has set a 2% inflation target. While inflation has risen a little bit, it's still well short of the target. More importantly, market indicators suggest that Japan is unlikely to hit the 2% target going forward. Thus, this story makes no sense:

The BOJ's board members expect that prices will reach 2 percent around fiscal 2019. If this happens, there's no doubt that we will consider and debate an exit," Bank of Japan Governor Haruhiko Kuroda told parliament.

Can someone explain to me why the BOJ would believe that inflation will soon hit 2%? Ten-year bond yields are currently close to zero, vs. 2.9% in the US.

With prolonged easing straining bank margins, some analysts have called on the BOJ to raise rates before inflation hits 2 percent, arguing that it was too high a level to aim for in a country that has suffered from two decades of deflation.

If the BOJ tightens policy by raising rates before hitting 2% inflation, within a year or two they'll be back down to zero.

PS. Can someone tell me if I'm reading this table correctly? Are forward discounts on the dollar quoted in basis points? Does this table imply the 30-year forward dollar is trading at only about 50 yen?

Comments

[Economic Analyst]

The evidence from Japan, which tried QE in 2001, suggests that QE will not inevitably lead to high inflation. If anything, the Japanese experience suggests that QE—or at least a failure to pursue QE aggressively enough—is not enough to avoid deflation (falling prices). From 1995 to 2012, Japan experienced 12 years of deflation (falling prices) and very low inflation in the other years. Although the central bank lowered overnight interest rates to low nominal levels and budget deficits were large (5.6% of GDP on average from 1993 to 2009), Japan was not able to break out of its deflationary trap.29 The Bank of Japan eventually tried quantitative easing in 2001, but on a smaller scale than the Fed (its balance sheet increased by about 70% overall).30Further, some economists believe that Japan’s deflationary trap was prolonged by sporadic attempts by the government to withdraw fiscal and monetary stimulus prematurely. QE was withdrawn in 2006 when inflation was still below 1% and economic growth was about 2%; prices and output began shrinking again following the 2008 financial crisis.

http://bit.ly/2DfeL9D

[User 42964126]

They're going to start rolling back the balance sheet like the U.S.A. is, how bad it will hit the Japanese economy, I can't say. I know it will be bad though for a while.

[Economic Analyst]

SS-Re forward discount, if face value over 360 months is roughly half, that implies an average delta PV of about 1.5%/year. Sounds about right to me.

[Ben Gee]

Japan will not get blood from stone.