In what may be one of the few sane policy recommendations to emerge out of Japan in years, Nobuyuki Nakahara, an adviser to Prime Minister Shinzo Abe and an influential former Bank of Japan board member said the BOJ should make a “clean break” from its current policy
approach when Kuroda’s term ends next spring, roughly at the same time as Yellen’s term is ending (at which point a Trumpian Fed is said to arrive). According to Nakahara, Kuroda’s successor should announce a “second phase” of the BOJ’s quantitative-easing program that end the BOJ’s attempts at “yield control” and slashes purchases of JGBs by at least half, Dow Jones reported.
He described the central bank’s efforts to control the yield curve as an attempt to make up for the “mistake” of introducing negative interest rates in early 2016.
In a radical – and accurate – departure from the status quo which will inevitably result in currency collapse and hyperinflation, controlled Inflation in Japan would return thanks to the correction in the yen’s strength, the tightening of the labor market to full employment and a tick-up in wages, the former central banker said, so the bank should scale back its efforts to fuel it. If the bank is reluctant to act so boldly, it should commit to buying only as many JGBs as needed to reach 2% inflation by 2023 at the latest, he added.
“Under the new governor they should think hard about what they will do for the next five years,” said Mr. Nakahara, who has already said he doesn’t favor a second term for Mr. Kuroda.
According to Nakahara, continuing to buy government bonds at the same pace of JPY80 trillion per year, will limit the bank’s leeway to respond in a crisis and stop interest rates from rising gradually as inflation picks up. A bigger problem is that as this website first, and then the IMF calculated, the BOJ will run out of monetizable debt in a little over a year, at which point it will have bond market failure to deal with as well.
The comments from Nakahara are a striking U-turn from one of the strongest Japanese advocates of QE, and are the latest indication that central bankers around the globe have realized the past 8 years of policies have led to a monetary policy dead end.
Last week, Japan’s government announced the unemployment rate in February fell to 2.8%, the lowest since June 1994, which in a normal world where the Philips curve works would have led to a spike in price, and yet in Japan CPI barely rose by a mere 0.2% (and that’sonly after using one of the BOJ’s endlesslyrevised CPI definitions).
“We have been fighting deflation for 20 years, and finally we have full employment, but the BOJ still hasn’t gotten consumer prices up or considered what kind of relationship it should have with the finance ministry regarding their JGB holdings,” he said. Well, the reason for the is demographics and technology, but one thing that is certain: keep pumping enough money, eventually shifting to the infamous monetary “helicopter”, and you will get your inflation, just like in Venezuela.
Nakahara hinted as much when he suggested that one measure the BOJ could consider would be turning one part of its JGB holdings into a perpetual bond, he added.
In other words, instead of pushing away from unconventional policy, Abe’s advisor was really calling for helicopter money, although since that is a Ministry of Finance responsibility and not that of the BOJ, one can see why the former central banker is eager to reduce the role of the BOJ.
Finally, Nakahara said there are risks for the BOJ and to his view. If domestic stock prices fall and the yen strengthens against the dollar, the bank would need to scrap its yield-curve control earlier and focus on bond purchases as its main policy tool. The same approach would also be necessary if global oil prices stagnate between $30 and $50 a barrel. Considering that the Yen is already surging, and a plunge in the Nikkei – which correlates one to one with the Yen – is now inevitable, means that far from scrapping QE, the BOJ may soon have to do much more of it, mercifully reaching Japan’s monetary endgame that much faster.
And speaking of the Yen, moments ago it just hit fresh five month lows.