On Monday, the two new policymakers of the Bank of Japan said that the monetary authority needs to come up with an exit strategy for dealing with its massive stimulus. This is a clear indication that the balance of the board could go in favor of withdrawing from the ultra-easy monetary easy of Haruhiko Kuroda, the Governor of the BOJ.
Newcomers speak up
A former private economist, the first newcomer is Hajime Takata, and he asserted that the Bank of Japan should have an exit strategy in place, even if it does not plan on ending the ultra-low interest rates right away.
Coming from a commercial bank, the second newcomer is Naoki Tamura, who said that once wages in the country also start rising with inflation, then there would be more discussion on the exit strategy from the existing easy policy of the BOJ.
On Sunday, the two newcomers joined the board of the Bank of Japan, which comprises nine members. They are replacing bankers Hitoshi Suzuki and Goushi Kataoka, a former economist who is a supporter of the ultra-easy policy. The two left because their five-year term had come to an end.
Shift in debate
Tamura and Takata did not hesitate in talking about exiting from the radical monetary easing. Their arrival could see the debate of the board shift less in favor of continuing with the huge stimulus. Another prominent dove part of the BOJ’s board is Deputy Governor Masazumi Wakatabe and his five-year term will expire next year in March.
The next departure would be of the Governor of the Bank of Japan himself and this could open up the possibility of the bank moving away from its current dovish policy bias. Market economists said that both newcomers believe that it is possible to tweak yield curve control sooner or later. But, they added that the timing was likely going to be after Kuroda’s departure.
Bank of Japan’s policy
In order to keep inflation at its target of 2%, the Bank of Japan keeps its short-term rates at -0.1% and the yield for 10-year bonds remains 0% under its YCC (yield curve control) policy. With inflation and interest rates going up all over the globe, there has been speculation that the BOJ could also follow the trend and dial down its stimulus, once governor Kuroda leaves.
Takata said that even though YCC is effective in giving support to the economy and sustainable, bank margins were narrowing because of the prolonged low rates and was also hampering the function of the bond market. Tamura asserted that there were questions about the effectiveness of the BOJ’s policy in the economy.
A bond market expert, Takata had once written that there could be pressure on the BOJ to consider departing from its easy monetary policy if the monetary stimulus is withdrawn by the European Central Bank (ECB). This is in direct contrast with Kataoka, his predecessor, who advocated ramping up stimulus and continued to support ultra-low rates for this purpose.