The developments in the Japanese financial markets over the past week has caused a lot of debate about the sustainability of the “Kuroda shock”. It is particularly the rise in nominal bond yields, which seems to have shaken some Japanese policy makers.
Even though the rise in nominal bond yields is a completely expected (for Market Monetarists) and welcomed (!) result of monetary easing it has nonetheless caused some to suggest that Kuroda’s monetary regime change is self-defeating.
As I have explained earlier the increase in bond yields in itself is not a threat to the recovery, but I must also admit that some Japanese policy makers (and a lot of commentators) have a hard time understanding this. It might therefore be warranted that Bank of Japan chief Kuroda puts the record straight.
He can do this by again and again repeating the following statement:
“The increase in Japanese nominal government bond yields is welcomed news as it reflects investors’ expectations for higher nominal spending growth. Furthermore, I am very happy to see that real bond yields continue to decline as markets are pricing in that we are increasingly likely to hit our 2% inflation target.
However, I am not satisfied with the speed of adjustment of market expectations to our inflation target. When we say we have a 2% inflation target investors should listen.
So while inflation expectations have increased they are still far below our 2% inflation target on all relevant time horizons. We therefore stand ready if necessary to further step up the monthly increase in the money base. We will evaluate that need based on market expectations of future inflation.
We will particularly focus on market pricing of 2year/2year and 5year/5year break-even inflation expectations. We want investors to understand that we will ensure that market pricing fully reflects our inflation target. That means 2% inflation expectations on all relevant time horizons. No less, no more.”
Anybody who have been reading my blog (and Robert Hetzel!) should understand why the reference to break-even inflation expectations is extremely important…
Mr. Kuroda, the advise is for free. Please take it.