No sooner do some hopeful signs appear that the Japanese economy may be on the mend, than the Bank of Japan announces it is rethinking some of its monetary policy operations. This is from the Financial Times:
Toshihiko Fukui, Japan's central bank governor, is on Wednesday likely to lay out the case for mopping up excess liquidity in the financial markets, according to government officials.
The BoJ is seeking to prepare the ground for a reduction of liquidity targets under its so-called quantitative easing programme from the current Y30,000bn-Y35,000bn. That might become necessary because of the difficulty of pumping liquidity into satiated markets, the bank says...
The BoJ has been struggling to conduct the market operations needed to meet liquidity targets, largely because banks that have regained financial health no longer fear a run on deposits. The BoJ says a clear sign that the financial system is healthier is the lack of depositor concern in the run-up to April 1, when the government will limit the refund to depositors in failed banks to Y10m for most accounts.
If such a move is made, it will clearly be proposed as nothing more than a technical operational adjustment of the sort central banks make all the time. But here's the rub. When it comes to operating in the neighborhood of zero nominal interest rates, expectations become the whole game. The key to the "quantitative easing programme" is to convince private market participants that policy makers intend to stick with the policy until the deflation woods are safely cleared. On this point, there are some who think the ice on which the BoJ is skating looks mighty thin.
The central bank must assure markets that reining in liquidity has no bearing on interest rate policy...
Some economists are concerned that the bank is twitching to unwind its quantitative easing policy prematurely, before deflation is defeated..
In the words of one of those economists (via Bloomberg):
"Even if the bank says a reserve target cut is just technical, financial markets may still take it as policy tightening or a preparation for tightening,'' said Mamoru Yamazaki, chief economist at Barclays Capital Japan Ltd.
And some of the skeptics are pretty high placed. From the FT article:
Sadakazu Tanigaki, finance minister, on Tuesday appeared to urge the BoJ to hold steady, saying: “I think it is necessary [for the BoJ] to keep taking effective measures to overcome deflation. The end of deflation has yet to come in sight.”
Stay tuned for tomorrow's announcements.