Unexpected move: A man walks pass the BoJ headquarters in Tokyo. The central bank’s shock move to rein in its ultra-easy monetary policy offers a peek into some of the surprises that await the world. — Bloomberg
THE Bank of Japan (BoJ) may have done the world a favour.
The central bank’s shock move to rein in its ultra-easy monetary policy offers a peek into some of the surprises that await the world. Thrills and spills will come in 2023, even if their scale doesn’t match the Tokyo bombshell.
As historic as the rapid interest-rate increases in most major economies have been in 2022, at least the trajectory of policy direction was clear.
Persistently high inflation and a late start to tightening demanded an aggressive campaign, especially from the Federal Reserve (Fed), but also in the UK, the eurozone, Australia and New Zealand.
Even those that got a slight head start on the Fed kept hiking relentlessly. You may not have known the precise size of the next move, but you had a pretty reasonable idea. Borrowing costs were going up, up, up.
It’s time for a new template. With some signs inflation has peaked – not everyone is convinced – and warnings of a global recession multiplying, officials are starting to qualify their hawkish comments.
A number of decisions in coming months may be tossups. The scenarios will range from raising to pausing and, as the year progresses, even whether to cut or, at least, start signalling the possibility.
Policymakers may not even be entirely sure themselves when they walk into the room. This is very different terrain from the past year, one almost purpose-built for surprises.
Enter BoJ governor Haruhiko Kuroda, who hasn’t been averse to blindsiding investors over the course of a long career.
There were vibes that his successor was likely to institute some kind of review of the bank’s stance, but this was seen as something for after Kuroda departs in April.
None of the 47 economists polled by Bloomberg News predicted Kuroda would allow the yield on 10-year bonds to climb a bit more beyond zero. The astonishment led to a surge in the yen and a quick move by traders to test the new 0.5% upper limit on long-term government debt.
There were howls of outrage that no effort had been made to lay the groundwork, no leak to a favoured news organisation, let alone a few lines in a speech that might at least have injected a little doubt into the outcome.
As jarring as the spectacle was, it reminded us never to be complacent about central bank meetings, no matter how certain consensus may seem to be about the likely outcome.
Will monetary watchers be thrown off next year in similar ways? Perhaps not to the same extent. My point is that the tea-leaf reading gets harder in 2023, the range of outcomes becomes greater.
The same day as the BoJ fracas, the Reserve Bank of Australia revealed that its board this month mulled three scenarios: a hike of 50 basis points, one of 25 basis points and – something we haven’t heard for a while – a pause.
Get used to more of this. Remember in September, amid a horrific run on UK assets, traders saw the Bank of England (BoE) lifting rates by hundreds of basis points in coming months?
The hike on Dec 15 was notable not for the half-point climb in the benchmark rate, but for the two policymakers who thought the bank had already done enough.
When it was the European Central Bank’s (ECB) turn later the same day, people were taken aback by how tough on inflation the ECB sounded.
These are the sort of bumps that come along when the heavy lifting is done, but it’s unclear how much mopping up is required.
Granted, the BoJ still looks über-dovish relative to its Group of Seven peers.
That such a small step toward less loose policy can cause such ructions underscores the need for caution – and skepticism – when prognosticating on the monetary-policy future.
Kuroda also reminded us that forward guidance, the practice central banks elevated into an art form in the years after the 2007-2009 global financial crisis, has become almost obsolete.
The idea was that by signalling intentions well in advance, central banks would generate fewer market-rocking surprises and even let investors do the work for them through changing financial conditions.
Ben Bernanke, the former Fed boss who turbocharged the role of forward guidance, even observed that effective policy was 98% talk and 2% action.
Forward guidance worked best in the era of relatively contained inflation, an environment that encouraged monetary authorities to make some pretty long-term projections. (Not promises, they hastened to add.)
Such hand-holding has had a rough time.
A year ago, the Fed finally retired “transitory” as a way of describing the price surge rippling through the US and global economies, but was still anticipating only three-quarter-point increases in 2022.
Quite the miss. Chair Jerome Powell now doesn’t bother being too specific about the next few meetings.
Wisely so: It’s become fraught. In its review of forward guidance, a chastened Reserve Bank of Australia said maybe it’s better to leave it to markets to provide the best guess of where rates are headed.
That’s a fairly extreme response to some verbal lapses late last year, but it’s nonetheless a sign of the times.
Too often, Japan has been regarded as an outlier, the BoJ a perma-dove, unable to dismantle in any meaningful way the loose stance that’s characterised policy the past few decades.
There are times, however, when the BoJ shows the way, as it did by pioneering quantitative easing, now considered a fairly mainstream tool. The nation sent up a flare this week about regime shifts.
Call it the Kuroda dividend. — Bloomberg
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. The views expressed here are the writer’s own.
