No QE Exit Strategy for Japan

For a central bank that doesn't want to talk about an exit strategy, the Bank of Japan sure is talking a lot. The message: When you raise the subject, make sure you say you aren’t even considering discussing the possibility of tightening monetary policy. It's the unwinding debate that isn't a debate.

In minutes published this week of their June meeting, BoJ officials devoted a meaty paragraph to the dangers of communicating an exit strategy. The public simply won't understand, they warned, and, in any case, the prospect remains a way off and circumstances can change. If the bank had to change its narrative later, that would be even worse, Bloomberg reported.

A couple of brave souls disagreed and said "it was important for the bank to thoroughly explain and gain a better understanding among the people of its thinking on monetary policy management." For their trouble, they earned this retort from a colleague that appears as the document's last word on the matter:

"Even if the bank explained its exit strategy in advance, it was possible that the actual steps of an exit would differ from earlier explanations, as in the case of the Federal Reserve, and therefore careful preparations and thorough explanations were needed in communicating with the market."

Just in case the message somehow wasn't clear, two new BoJ board members repeated the point in their debut press conference. Nobody at the BoJ is going anywhere near an exit anytime soon, they declared. "Somewhat risky," said Hitoshi Suzuki, whose five-year term began July 24.

Japan Standing Alone

So with inflation above zero but well below the BoJ's 2%, why is this non-discussion even rearing its head? It's because Japan is really standing alone among its developed world peers in not even countenancing the concept of exit from ultra-loose monetary policy. The BoJ was first in, a pioneer of quantitative easing. It looks set to be the last out. And it’s starting to feel a bit self-conscious.

Don't let European Central Bank President Mario Draghi's constant mention of "a very substantial degree of monetary accommodation" mislead you; the ECB will almost certainly begin to taper its quantitative easing program in the next few months. The Bank of Canada has already raised rates and the Bank of England might do so as soon as next month.

Japan is hardly a disaster. Its economy has been expanding for five quarters—not an easy feat when a shrinking population means a low potential growth rate—and forecasts last week predicted a few more years of pickup. But the recovery just isn’t translating into large pay gains or a spike in inflation. While prices are no longer declining, the BoJ remains a long way from its target—much further than its peers. That's not something bank officials want to dwell on.

Pushing Inflation Higher

Ironically, the BoJ minutes aren’t entirely despairing about wages, which are critical to the notion that inflation will climb, ultimately, to the bank's target.

The big story in the current global expansion is that very low unemployment has failed to translate into the meaningful wage gains that, in turn, are supposed to push inflation up to the central banks' targets, generally around 2%. For their part, BoJ policymakers draw a couple of distinctions. The first is between part-time and full-time employees; the second is between small firms and large firms.

Governor Haruhiko Kuroda and his board sound more upbeat on the first of each of those two categories. The minutes note approvingly that part-time wage growth is relatively high at 2.5% to 3%. And in employers’ annual wage negotiations with labor unions, employees at small firms did markedly better than large companies.

Then there’s the dwindling labor market. If bosses don’t hang onto workers, they may not be able to find replacements. "One member said that, due to the tightening of labor market conditions, an increasing number of firms would raise wages of regular employees with the aim of securing the labor force."  

So it’s not all bad for Japan. It’s just that after multiple false dawns the past three decades, officials probably can’t quite believe that enough progress will be made to warrant a true exit. That's reason enough to keep their cards close.