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Could the Bank of Japan Policy Shift Already?

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Deputy Governor Iwata on Monday became the first senior BoJ policymaker to directly mention a change of existing the QQE program. Japan’s CSPI price gage for April came in today above expectations at +3.4% year over year, providing a fresh sign that BoJ stimulus it working. With the tax hikes on retail items just beginning to take a bite, it seems early for the BOJ to start reducing stimulus.

A Reuters article citing “current and former central bankers familiar with internal discussions” confirming that an informal debate is under way in the BoJ with regard to detailing an exit from quantitative and qualitative monetary easing program. The article points that the inflation now past the half-way mark with regard to achieving the 2.0% target, and the signs are that the economy has weathered last month’s sales tax increase.

However, the article also suggests that BoJ chief Kuroda is keen to avoid market confusion and volatility that the Fed triggered in May 2013 when it first signaled the possible “tapering,” and that the BoJ has no plans to trim the stimulus or publicly suggest the eventual drawdown “anytime soon,” according to sources. There is a strong sense within the BoJ board that the stimulus so far has worked well and the next step, albeit distant, could be policy tightening, not further easing.

Although the stimulus is showing up in some economic data, the yen remains strong and inflation is very low. The yen needs to weaken for exports to start to drive economic activity, and inflation needs to grow beyond Tokyo. The April tax hikes are just beginning to show their effect, and policy makers will likely need to the Q4 to see if the Japanese economy is self sustaining.

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