“Has the BoJ signalled the end of QE as we know it?”

That’s what David Keohane asks in yesterday’s FT Alphaville based on recent Citi and Goldman research notes.

Citi’s Buiter:

“In some ways, it is startling that the BoJ, while admitting that inflation rates have weakened (even though still forecast to reach the target in 2019), left the policy rate unchanged and picked the new 10-year yield target around current levels. Today’s decision therefore does not imply any further easing.”

The BOJ’s unexpected new approach is probably a stopgap solution to three prickly problems;

  • They’ve become way too dominant in the JGB market.
  • The flattening of the yield curve and negative short rates are playing hell with bank profitability, and that of the financial system more generally.
  • What they’ve been doing isn’t working.

Even assuming steepening the yield curve might do some good and is practically possible, the attempt will bring a new bunch of problems in its wake. Read the rest of this entry »