Japan’s war against deflation: progress and risks

August 16, 2014

More than a year after its launch, the impact of “quantitative and qualitative easing” seems pervasive. The Bank of Japan asserts that the output gap has closed, that inflation expectations have increased, and that the conquest of deflation would be in sight. The policy board has maintained its commitment to the 2% inflation target through forward guidance and large-scale JGB purchases. However, without successful fiscal consolidation and supply side reforms this policy poses new serious risks.

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Japan’s new policies and the threat of rising yields

August 10, 2013

A large rise in bond yields would threaten Japan’s sovereign solvency and banking system stability (view post here). New IMF econometric estimates suggest that the Bank of Japan’s quantitative and qualitative easing should lift yields just modestly, as rising inflation expectations would be offset by large public bond purchases. Meanwhile, the deteriorating fiscal trajectory could cause a 400bps rise in JGB (Japanese Government Bond) yields by 2030.

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Bank of Japan policy and long-term bond yields

July 24, 2013

A speech by Bank of Japan’s Takehiro Sato underscores that stabilizing long-term JGB yields has become a particular focus in the context of “Qualitative and Quantitative Easing”. This reflects the vulnerability of the country’s banks to higher yields (view post here), and the huge debt stock of the government. The Bank reckons that the sheer size and flexibility in its bond purchase program are at present sufficient to contain yield volatility and levels.

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Historical precursor of Abenomics

May 13, 2013

Warwick professor Nicolas Crafts notes that the UK’s exit from recession and deflation in 1930s has similarities to Japan’s current expansionary policy. At the time the UK managed recovery and reflation through very low rates and initial currency devaluation. Crafts argues that such strategies may require abandoning inflation-targeting independent central banks.

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Japan’s “Quantitative and Qualitative Easing”

April 14, 2013

On April 4 Bank of Japan Governor Haruhiko Kuroda unveiled aggressive “Quantitative and Qualitative Monetary Easing” (QQE), in order to meet a 2% inflation target within two years after 15 years of deflation. QQE means a shift of the operating targeting of the central bank to the monetary base, massive planned bond and other asset purchases, and a significant extension of duration in bond purchases. Market commentators almost uniformly concluded that QQE marks an extraordinary policy shift with historical dimensions and significant implication for global asset prices.

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