An Orderly Withdrawal?

On one version of events the Bank of Japan is simply dotting the 'i's and crossing the 't's on it road map to exit the massive monetary easing process sometime during the next six months. On another the road itself is fraught with difficulty, and an overly 'inflation wary' central bank might risk upsetting the whole apple cart if it proceeds to rapidly. It is this tension which seems to be reflected in today's FT article from David Pilling about a shouting match which seems to have broken out between the Ministry of Finance and the BoJ. According to Pilling:

Japan’s government on Monday tried to calm a potentially explosive row with the central bank over the timing of monetary tightening, saying there was no “wavering of trust” in its relationship with the Bank of Japan.

The MoF is concerned that any premature monetary tightening could threaten fragile economic growth and limit its ability to conduct what it considers essential fiscal tightening.

MoF officials are also concerned that the central bank may cut its purchases of government bonds, currently at Y1,200bn a month, as part of monetary tightening, a move that could push up long-term rates and damage efforts to roll over huge quantities of public debt.

Hidenao Nakagawa, policy chief of the ruling Liberal Democratic party, is quoted as saying:

“The BoJ has no independence when it comes to policy targets.If it does not understand this, we need to consider amending the BoJ Law”

Former BoJ board member Nobuyuki Nakahara is also cited as saying that the central bank was “crazy” if it thought the government would let it reduce JGB purchases, since it was a move which “would immediately invite long-term rates to rise.”

Coincidentally or otherwise the FT also has a story today about how Sadakazu Tanigaki, Japan's finance minister, said on television on Sunday that spending cuts and a reduction in debt issuance were not sufficient to restore government finances to sound health, and that an increase in consumption tax was required to tackle the country’s heavy debt burden.

And if anyone is really interested in following where the coincidences end here and the patterns begin, the FT has another piece, about Germany this time, where it notes that the new coalition partners "are poised to preside over one of the most fiscally conservative governments in nearly two decades". Value-added tax is about to rise by three percentage points from 2007, with two-thirds of the proceeds going towards plugging the budget hole. The top tax rate for high earners will rise by three percentage points, and many tax incentives that had allowed Germans to minimise their tax bills will be scrapped. A corporate tax reform intended for 2007 will also be postponed by one year.

Of course both Japan and Germany are countries with export driven economies, running balance of payments surpluses, and where domestic consumption has been running notoriously weakly, so the ecopnomic rational here is peculiar, except for the fact that both have the fical holes due to the presence of rapidly ageing popultaions.

Still, if you want to follow the coincidence through to the end, what's the betting that government representatives in Germany (but this time perhaps diplomatically), are making it known over at the ECB that moving later rather than sooner with any rate rises would be greatly appreciated.