There’s something amusing about employing the term “early” to describe a prospective Bank of Japan exit from extreme monetary accommodation.
The yen and JGBs grabbed a few headlines Thursday amid speculation the bank may be closer to raising rates than most traders anticipated.
Before we get carried away, let’s not forget that even if Kazuo Ueda exited negative rates later this month, that wouldn’t be “early.” The rest of the developed world just finished up the most aggressive rate-hiking campaign anyone younger than 45 has personally ever witnessed, and if the BoJ’s adventures in monetary Neverland were feature films, we’d be well into the double-digits by now in terms of superfluous, campy sequels.
No matter what Ueda does over the next six or so months, that word “normalization” will remain a farcical misnomer in the context of Japanese monetary policy. I doubt seriously that I’ll live to see “normal” at the BoJ, and I’m not sure I’d know if I saw it. What does “neutral” monetary policy even look like in Japan?
With that out of the way, traders were in a tizzy over a speech from Deputy Governor Ryozo Himino who, on page 10 of a 20-page speech to business leaders in Oita, asked “What would happen if an exit from the large-scale monetary easing starts in the future?”
Do stop to chuckle: The BoJ’s experiments have been going on for so long that an exit has to be framed as a hypothetical — an experiment of its own. “What would happen if we started to stop snorting Xanax in the future?”
“These are complex questions that need to be considered from various perspectives,” Himino said, of the myriad uncertainties associated with a BoJ exit. “The outcome would depend on the specific condition at the time and on the way monetary policy is modified,” he went on. “There would be no easy or simple way to predict the outcome.”
Again, it’s hard not to laugh. If you’re interested in the full speech, you can find it in English here, but suffice to say the mere fact that Himino spent so much time discussing an exit and, importantly, suggesting that it might not be as painful or disruptive as some fear, was enough to stoke rate-hike bets, particularly when paired with remarks from Ueda himself.
The conduct of monetary policy in Japan, Ueda told Japanese lawmakers, “will become even more challenging from year-end and heading into next year.” Later, Ueda showed up at Fumio Kishida’s office for a chat about policy.
The market got the message. The yen rose nearly 2% at one juncture.
“The focus here, once again, is whether the BoJ plans to end eight years of negative interest rates when it meets” this month, ING’s Chris Turner said Thursday. “The FX market has been here many times before — only to be rudely disabused of its speculation every time.”
At its October meeting, the BoJ adjusted its yield-curve control framework for the second time in three months in what was widely viewed as the beginning of the end for YCC.
Just in case things needed to get any more exciting, a 30-year JGB sale on Thursday tailed badly, where that means the most ever, prompting a sharp local bond selloff.
It’s worth noting that the BoJ “normalization” process, whatever it looks like, will unfold against a backdrop of easier Fed policy, at least at the margins. I’ll just leave that there.
This month’s BoJ meeting concludes on December 19. Recall that Haruhiko Kuroda blindsided markets with a YCC tweak last December.
“One day, the BoJ will be confident enough that the Japanese economy is exiting its long deflationary hibernation to get rid of its negative rate policy,” SocGen’s Kit Juckes wrote Thursday. “That day is getting closer but whether it is now only a week away, I have no idea!”
In the same remarks to Japanese lawmakers mentioned above, Ueda said it’s hard to know what the right policy rate is for Japan. “I don’t have anything in mind at all for what it should be,” he said.
