Japan’s success in rekindling inflation is raising the stakes for policy makers to map out the endgame for monetary stimulus, given the risk of a surge in yields when the Bank of Japan winds down bond purchases.
With the BOJ’s benchmark inflation gauge past halfway to Governor Haruhiko Kuroda’s 2 percent target, yields on 10-year government securities are still the world’s lowest at 0.67 percent — held down by central bank purchases of unprecedented scale. Even so, Kuroda, who meets with fellow board members next week, says it’s “too early” to discuss an exit strategy.
In the absence of the BOJ, investor demand for compensation from inflation could send the government’s borrowing costs surging, fueling the danger of a collapse in confidence in the fiscal sustainability of the world’s third-largest economy. Kuroda should start thinking about “disengaging” now, according to economist Richard Koo.
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