How the Bank of Japan's plan for a smooth stimulus exit stumbled
By Leika Kihara, Takahiko Wada and Mariko Katsumura
TOKYO (Reuters) — The Bank of Japan's strategy for an orderly exit from years of massive stimulus unraveled on an overcast day in December when Governor Kazuo Ueda and two deputies gathered at the bank's Tokyo headquarters.
Inflation was slowing more than expected, complicating the central bank's plan to end negative interest rates by March or April and then follow quickly with further increases. The officials considered two alternatives.
The first option was to wait for signs of economic improvement and then go ahead as planned. The second was to end negative rates but hold off on subsequent increases.
Ultimately, the MIT-trained Ueda went with the second option, allowing Japan to shed its title as the last country with negative interest rates but leaving it short of its hoped-for normalisation and still facing years of near-zero rates that pressure the hard-hit yen.
«With the economy lacking momentum, there was a growing feeling within the BOJ that inflation might not stay around 2% that long,» said one person familiar with the deliberations, referring to the bank's key target.
«The BOJ leadership probably realised that time was running short, if they wanted to end negative rates.»
The decision was also complicated by differences between Ueda's two deputies, as well as the governor's wavering on the exit timing. The existence of the two plans, and other details about the deliberations, are reported for the first time by Reuters.
This account is based on interviews with 25 incumbent and former central bank officials with direct knowledge of the interactions, or familiar with the personalities and dynamics of the bank's leaders, as well as five government officials in
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