exit strategy (Yoda Kuroda)

Nikkei Sinks Again Amid Mixed Signals From Central Bank

In Tokyo, the minutes of the Bank of Japan’s policy meeting on April 26 revealed a degree of doubt about the bank’s ability to inject a healthy dose of inflation into an economy that has suffered from crippling deflation for years. 

According to the minutes, “a few members” pointed out that the goal of 2 percent inflation appeared “difficult to achieve” in the planned time frame of about two years, “since it was highly uncertain whether changes in inflation expectations would lead to a rise in the actual rate of inflation.” 

Some board members also noted that the bank’s aggressive easing policies appeared to have been perceived by the markets as “contradictory” — comments that highlighted the challenges that the bank and policy makers are wrestling with. 

The bank, on one hand, has committed to ending deflationary expectations and starting an economic recovery by flooding the economy with money, which would cause long-term interest rates to rise. But the bank has also committed to keeping those interest rates in check, partly by buying large amounts of government bonds. That has sowed confusion among market players over whether they should welcome or worry about the recent rise in long-term rates.

Haruhiko "The Keymaster Yoda" Kuroda should say "we want long-term interest rates to remain low until we hit 2 percent inflation, with the economy running at full capacity and potential levels and with the output gap closed. This means 2 percent inflation, not runaway inflation. To prevent runaway inflation we'll allow long-term rates to rise at the appropriate time. This will contain inflation. Hope that clears things up. Market players should look for signs that the output gap is closed. That's when rates will rise. We estimate output gap closure in two years depending on the international economic context (see China, the U.S. and Europe.)"