BoJ governor Kuroda has plenty of time and should use it

Is the Bank of Japan about to embrace tapering? The idea suddenly came into renewed focus at the beginning of the week when the BoJ reduced its purchases of long-term securities as part of its usual quantitative easing operations. The market responded without delay: the price of Japanese government bonds immediately declined, but more importantly, the yen rose against most other major currencies. It is understandable that the markets would anticipate such a change. The BoJ’s increasingly large recovery operations have been underway for many years and have inflated its balance sheet to 92% of Japan’s GDP, while the Fed and the ECB have both committed to gradually reducing their monetary policy support. What’s more, the Japanese economy seems to have found new vigor in the last year. That said, it is unlikely that the Bank of Japan has the latitude to begin reducing its monetary support. There are at least three reasons for this.

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