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Trading news
27 Apr 2015
BoJ will ultimately have to abandon price stability – BNPP
FXStreet (Barcelona) - As the Japanese central banks continues to purchase JGBs, the BNP Paribas Team explains that the BoJ will have to choose between stable policy rates and stable inflation once nominal growth of Japan picks up.
Key Quotes
“What Mr Abe has in mind, however, seems to be to hold the cost of capital to the government1 sufficiently below the nominal growth rate to make it possible to reduce the debt-to-GDP ratio even when the primary balance remains in deficit. In other words, he wants to undertake fiscal restructuring without tax hikes or spending cuts, by means of financial repression.”
“What might happen if the Bank of Japan (BoJ) persists with its current policy of buying up virtually all Japanese government bonds (JGBs) issued once nominal growth picks up? In theory, the BoJ will have to choose between stable inflation and stable interest rates. If the long-term interest rate can be held at a low level, even after inflation revives, real interest rates could fall far below zero, triggering faster JPY depreciation and further stoking inflation.”
“Of course, to avoid this, the BoJ could tolerate a rise in the long-term rate. But doing that could cause the public debt to spiral out of control on surging interest payments.”
“As the trade-off between stable inflation and stable interest rates is effectively a trade-off between the pursuit of price stability and the avoidance of fiscal chaos, the BoJ will ultimately have to abandon price stability.”
Key Quotes
“What Mr Abe has in mind, however, seems to be to hold the cost of capital to the government1 sufficiently below the nominal growth rate to make it possible to reduce the debt-to-GDP ratio even when the primary balance remains in deficit. In other words, he wants to undertake fiscal restructuring without tax hikes or spending cuts, by means of financial repression.”
“What might happen if the Bank of Japan (BoJ) persists with its current policy of buying up virtually all Japanese government bonds (JGBs) issued once nominal growth picks up? In theory, the BoJ will have to choose between stable inflation and stable interest rates. If the long-term interest rate can be held at a low level, even after inflation revives, real interest rates could fall far below zero, triggering faster JPY depreciation and further stoking inflation.”
“Of course, to avoid this, the BoJ could tolerate a rise in the long-term rate. But doing that could cause the public debt to spiral out of control on surging interest payments.”
“As the trade-off between stable inflation and stable interest rates is effectively a trade-off between the pursuit of price stability and the avoidance of fiscal chaos, the BoJ will ultimately have to abandon price stability.”