Will the major central banks evolve into mega-hedge funds?
Here is the latest from Japan:
Bank of Japan officials are considering maintaining a large balance sheet for the central bank even after it achieves its inflation target, reducing the risk of a surge in long-term bond yields, sources said.
Under the potential strategy, the BOJ would use cash from maturing securities in its portfolio to buy long-term government debt, the sources said, asking not to be named as the talks are private. Gov. Haruhiko Kuroda and his colleagues have yet to meet their inflation target, and pledge to continue asset purchases until consumer prices are rising at a 2 percent pace.
The possibility of permanently large balance sheets — in Japan’s case, now amounting to more than half the size of the economy — may become a global legacy of unprecedented stimulus measures. The BOJ discussions parallel preparations at the U.S. Federal Reserve to avoid an exit strategy of asset sales.
“There’s no need for the BOJ balance sheet to go back to where it was,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former BOJ official. “It’s a realistic approach to keep the size of the balance sheet large for a while to avoid a spike in yields.”
Any abrupt end to government bond purchases by the BOJ could send borrowing costs soaring, because the bank currently purchases the equivalent of about 70 percent of the new securities issued.
Were not these exit strategies supposed to be easy and painless? Maybe they are, except having no exit strategy is all the more easy and painless. In their shoes, I would not do differently but my level of unease with this situation continues to increase.
There is more here, via www.macrodigest.com. And here is a new VoxEU piece on what we know about the macroeconomic effects of asset purchases. And here is Noah Smith mounting a defense of Abe.