E The Great BOJ Rotation In Place Of QE Exit

The latest nail in the coffin of beleaguered BOJ Governor Kuroda came in the form of unattributed leaks from his colleagues. These leaks assert that the BOJ will lower its inflation forecast, whilst simultaneously keeping the current monetary stimulus at the same level. The signal is that Kuroda wishes to patiently press on with his journey to hit his inflation target and that this journey just lengthened in time. The problem for Kuroda is that he does not have the luxury of time on his side. If anything, his growing list of critics will use this, inflation forecast lowering and lack of monetary policy response, as a symbol of failure that will cost him his job. Kuroda is increasingly being framed as out of touch with what it takes to perform his part of the initiative known as Abenomics.

Former BOJ Board member and architect of QE Nobuyuki Nakahara was observed in the last report inflicting damage to the straw man figure that BOJ Governor Kuroda has now been framed as. Further damage has now been inflicted by close Abe confidante Etsuro Honda, who has openly called for a change of BOJ Governor. Previously in January of this year, Honda had been for Kuroda, so his recent change of heart may owe more to the deteriorating fortunes of Prime Minister Abe than anything the BOJ Governor is guilty of. Abenomics apparently needs to be refreshed, but the current global central bank imperative to scale back QE to deflate asset bubbles does not provide much potential for Japanese monetary policy rejuvenation. Abe’s recent dismal local election failures and deteriorating public image offer little scope for refreshment in the political arena either; which means that he may have to default to fiscal policy to rebuild his political capital. 

A new BOJ Governor is expected to symbolize said rejuvenation, even though there is little that said new Governor can do in the way of radically new policy to confirm this. Honda basically said as much, when he acknowledged that the current global asset bubble deflation mission cannot be avoided. He also concurred very closely with Nakahara’s prognosis that any BOJ QE exit should be postponed for as long as possible. Nakahara had set this at five years. Honda hinted that there will now be a fiscal stimulus, to pick up the heavy lifting; and that this will be deficit negative since it will not be mitigated with a sales tax increase. Evidently Japan is going to use fiscal policy to weaken the Yen and boost inflation and the BOJ will be required to enable this with its balance sheet.