Why Tapering Is a Dirty Word in Japan

(Bloomberg) -- The Bank of Japan repeatedly insists it’s not trying to scale back its monetary stimulus by reducing, or "tapering," its bond buying. However, many observers interpret its actions as precisely that and a possible step toward a policy exit. The disconnect has given rise to the phrase “stealth tapering.” By stealth or not, any move seen as a shift toward the end of stimulus can upset markets, especially when the central bank’s presence in those markets is so big. The BOJ’s balance sheet is about to exceed the size of the economy as it continues to pump vast quantities of money into the financial sector by buying bonds, stocks and real estate investment funds -- part of its program to generate inflation and stir the economy out of decades of slumber.

1. What is stealth tapering?

Dialing down monetary stimulus without acknowledging it. The expression has been mostly used following sharp reductions in the BOJ’s bond purchases, though its stock buying has also entered the spotlight. BOJ Governor Haruhiko Kuroda denies the bank is tapering its asset buying. By stating in July that the BOJ would keep interest rates low for an extended period, Kuroda said he could counter speculation the bank was looking to exit its stimulus program.

2. What evidence is there of tapering?

The BOJ’s net bond purchases have almost halved since September 2016, when the bank changed its policy framework to target interest rates. Keeping the yield on 10-year government debt at about zero percent enabled the central bank to say it was maintaining its ultra-easy policy while buying far fewer government bonds. But many analysts, especially those outside Japan, have taken a different view, saying that the sharp reduction in bond buying below a stated target of 80 trillion yen ($703 billion) annually is a de facto paring of its stimulus. The BOJ gave itself even more latitude to lower its purchases in July by allowing larger deviations in the 10-year yield rate from its zero percent target. The policy tweak was described by most economists polled by Bloomberg News as stealth tapering.

3. What’s the problem?

Investors want to know all the tiny details when a central bank scales back its asset purchases. The Federal Reserve rocked global markets in 2013 when it said it would reduce its bond buying in an event known as the taper tantrum. While perceived tapering by the BOJ has hardly had the same impact on global markets so far, it has caused bumps in Japan’s bond market and sharp moves in the yen. Each time the bank enters the market to scoop up bonds, the exact amount is closely scrutinized to see if it translates into a further slowing of the purchases. In January, the BOJ helped trigger a month-long rally in the yen after unexpectedly cutting its bond purchases. Yields gyrated after the bank’s move in July to allow more flexibility in the 10-year yield. In short, the impression that the BOJ is not being entirely up front about its intentions creates uncertainty in markets and a risk that its moves will be misinterpreted.

4. Why would the bank want to reduce its bond buying?

Even after five-plus years of stimulus, the BOJ still hasn’t achieved its goal of boosting inflation to 2 percent. The longer it takes, the more the unintended side effects of its program will build up and the greater balance sheet risk it will face when it needs to unwind policy. The bank’s presence is distorting the bond market, while the artificially low bond yields resulting from the BOJ’s purchases are squeezing the returns available for banks, insurance companies and other financial institutions. Those side effects forced the BOJ to take steps to make its program more sustainable.

5. How much does the BOJ buy?

Under Kuroda, the BOJ was buying domestic government bonds at the targeted pace of about 80 trillion yen a year for around two years before the reductions started. In the 12 months to the end of August 2018, the central bank bought around 45 trillion yen and the pace keeps slowing. Five years of unprecedented monetary experimentation gave the bank ownership of 42 percent of Japan’s government bond market and 5 percent of its stock market, far higher proportions than elsewhere.

6. When will the easing program end?

By promising to keep rates low for an extended period while assessing the possible impact of a scheduled sales-tax increase in October 2019, the BOJ has effectively committed itself to continuing the program until at least the spring of 2020, given that inflation is not expected to hit 2 percent before then. Even BOJ board members don’t see 2 percent inflation arriving through the year ending March 2021. The last reference to a specific time period for an exit from easing came in March, when Kuroda said the bank would likely think about exiting its stimulus program in the year starting April 2019. He later said that he meant it would start to consider exiting in that year, not to exit, leaving the timing once again up in the air.

7. Why does this matter outside Japan?

Japan is the world’s biggest creditor. Its net $2.9 trillion international investment position is 41 percent bigger than Germany’s and almost twice that of China’s. A reduction in the BOJ’s stimulus, and a subsequent rise in Japanese yields, could funnel part of Japan’s portfolio investments back into the nation’s bonds and decrease demand for debt and equities overseas. That could add further momentum to yield gains overseas while adding to volatility in global stock markets. It would also have implications for the yen’s exchange rate. Right now, interest rates in Japan are much lower than in the U.S. If Japanese yields drift up, that could result in a stronger yen.

The Reference Shelf

  • Reaction to Kuroda’s comments on exiting stimulus.
  • A Bloomberg View column explaining why the BOJ is missing a chance to taper off its bond stimulus.
  • QuickTake on BOJ’s yield curve control.
  • A Bloomberg View column on how the BOJ is leaving exit clues.
  • Bloomberg’s Chris Anstey is interviewed about the BOJ’s "low grade war” with the markets.

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