How the BoJ MIGHT matter

So all this bling from the BoJ has not amounted to much, somewhat predictably. QE is, after all, just a shortening of the effective maturity of the federal government debt, undertaken by the central bank on behalf of the treasury, rather than directly by the treasury.

I would say the number of people who get this might be fewer than the slim minority that Occupy Wall Street complains about. Of course, because people don’t get it, there can be a short run reaction, as we clearly saw when Abe and Kuroda got going. I remember a colleague asserting extremely confidently, as if colleague knew why, that 120 on dollar yen was a no brainer. And briefly it was, I assume because of the self-fulfilling prophecy.

Anyhow, over time dollar-yen has been meh.



Core inflation, as very nicely reviewed by JMA, has briefly come up a bit but has recently been slipping.


And breakeven inflation has actually been falling. I really do wish they would rescale that chart.



But IMHO, the BoJ’s efforts have not been utterly pointless. They have arguably put themselves in the way of good luck, by announcing a willingness to allow inflation to overshoot the 2% long-term target.  IFF the global economy were to enjoy a boom and Japan’s inflation rate were to begin to cycle higher in response to that, then the BoJ’s promise not to mess with that would provide some upside convexity in that case.  Moreover, people speculating now on (or assigning some probability to, no matter how low) that upside convexity should move the distribution for forward inflation slightly right, although I concede that has not actually happened.

It is just that this has nothing to do with the QE nonsense that people write endlessly and totally innocently about. Nor is it “effectively” h money, as I saw a slippery BoJ watcher asserting.

If I were a policy maker about to embark on a steep inflation, I would lengthen, not shorten, the maturity of the debt. But that is a separate discussion. As a clever fellow on Twitter said in an exchange, let’s keep this to one god-like policy initiative at a time.