Japan gives up on activist monetary policy

In Japan, benchmark interest rates are negative, quantitative easing is continuing–yet the hawks seem to be winning the argument for the future of monetary policy, Mike Bird writes for Heard on the Street.

KEY FACTS

— Last week the BOJ offered its most lacklustre forecast for inflation under Gov. Haruhiko Kuroda.

— Paradoxically, however, the board’s forward policy guidance took a hawkish turn.

— It pledged to keep the short-term deposit rate at minus 0.1% until the spring of 2020…

— …replacing previous guidance that simply referred to an extended period.

— With very little fanfare, the speed of expansion in the BOJ’s balance sheet has slowed.

Why This Matters

One implication: investors shouldn’t expect much help from the Bank of Japan if PM Shinzo Abe’s proposed sales tax throws economic growth off course. In 2014, an increase to the tax hurt Japan’s recovery but was offset by no-holds-barred bond purchases. If the government goes ahead with another increase, the economic fallout this time could be severe.

A fuller story is available on WSJ.com

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