Wakatabe: BOJ Moving Cautiously on QT to Avoid Bond Market Upset

The Bank of Japan just threw a major curve ball at bond and currency markets, at investors around the world as it decided not to reveal how much it is going to cut its bond purchases, another big step toward policy normalization. Before the meeting it seemed the only question was how big and how quick the drop in bond purchases will be. Now it appears that the BOJ will not announce the important particulars of its plan until it meets again in July. And it casts some doubt on the likelihood of what has been a widely expected rate hike at the July meeting.

Enter Masazumi Wakatabe. He was Deputy Governor of the Bank of Japan from 2018 to 2023, when he returned to Waseda Univesity to continue his closely followed work on central banking in theory and in practice, and on the historical relationship between economic crises and economics.

He says the BOJ is moving cautiously and slowly on QT because it does not want to cause volatility in the bond market. And that it’s significant that the central bank plans to work directly with bond market participants to determine the size and scope of this program, what he says is an unprecedented step.

As for a rate hike in July he says it’s possible, but not likely. The BOJ may want to wait and see if key measures of inflation are able to hold well above 2%. And to see if the growth in wages translates into more consumer spending, and growing inflation expectations.

Wakatabe san has been very good at understanding, explaining and seeing where the BOJ is going on its policy path. That’s why I wanted to hear from now as the BOJ takes the latest steps on its historic policy path and now you can hear his views too.

P.S. And for all of you monetary policy nerds like me out there, a bonus: Professor Wakatabe weighs in on what he sees Japan’s neutral rate, and the likely terminal rate for the BOJ’s key policy rate over the next couple of years. Yes, it’s not just the Fed who debates and watches this closely.