Bank of Japan, more confident about recovery, quietly eyes stimulus exit

Mon May 26, 2014 5:36pm EDT
 
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By Leika Kihara

TOKYO (Reuters) - 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.

But with inflation now past the half-way mark and signs that the economy has weathered last month's sales tax increase, Japanese central bankers are already thinking about the next chapter.

First of all, Kuroda and his team are keen to avoid market confusion and volatility that the U.S. Federal Reserve triggered in May 2013 when it first signaled the possible "tapering" of its extraordinary stimulus.

With the BOJ churning out 60-70 trillion yen per year($589-687 billion), withdrawal symptoms could be similarly acute and the lesson for the BOJ is that signaling a tapering too soon or being too specific could backfire.

With that in mind, the BOJ has no plans to trim the stimulus or publicly suggest the eventual drawdown any time soon, say those familiar with the internal debate.

But whereas weeks or months ago that debate would center on the potential need for more easing, now there is a strong sense within the BOJ board that the stimulus so far has worked well and the next step, albeit distant, could be policy tightening, not further easing.   Continued...

 
Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo May 21, 2014. REUTERS/Toru Hanai