BoJ Quietly Looks For A Way Out While Keeping Rates and Volatility At A Minimum

by on May 27, 2014 9:20 am BST

The Bank of Japan (BoJ) embarked on a crusade to end deflation last April with a quantitative easing program that, in relation to the size of their economy, is three-times that of the Federal Reserve. However, with consumer prices creeping higher, the central bank will look for methods to keep growth steady while dialing back asset purchases.

It is unknown how or when the BoJ will taper their program because BoJ Governor Haruhiko Kuroda has previously said that easing would continue even if consumer prices extended beyond the two percent target. This is, also, contrary to what some economists expected would happen so soon. Many economists believe the central bank will add to the stimulus program within the next year, which is the opposite of what current and former central bankers similar with internal discussion said. Debate is under way on how to prepare an exit.

The BoJ has kept a tight lid on the prospects of a taper because it aims to reduce the risk of market volatility caused by mis-communication and confusion. The holdings of government debt (JGBs) are so large, a one percent move in interest rates would result in a loss of several trillion yen.

Deputy Governor Kikuo Iwata said that the stimulus can be a double-edged sword. “The BOJ’s current policy intends to prevent not just deflation but inflation from well exceeding 2 percent, such as to 4 percent or 5 percent, for a medium- to long-term period,” said Iwata. The problem, though, is once inflation begins to pickup steam, there is no real quick fix to stop it. The timing of the taper is the most critical part of ending quantitative easing.