Kuroda's tough task: Navigating the long road toward stimulus exit

A lot of government deficit financing for years, with no inflation target met.

(Besides the obvious costs of easing and potential issues coming with attempts to exit the policy, personally I fear there is an accident waiting to happen in the rental housing space - these days tv is awash with commercials promoting rental ownership - in a country with a shrinking, aging population, in no small part due to low interest rates. Crashed rental prices will ironically be rather deflationary in future.)

It’s time for structural reforms to the economy and prioritzation of public spending. Better take action now rather than wait for the next crisis to precipitate it.

Throw away this dopey inflation target too. No one really wants that except for the hugely indebted - that is the government types who crave power through the ability to spend money they don’t have.

Mr. Kuroda's BOJ monetary policies have been pinning rates down by manipulatively fixing their 10Y yield at or near zero. As a result, this method have been the anchor for other global interest rates. There are visible preliminary QE tapering/exit signals coming from ECB as well as some delicate clues from Japan for their quantitative, qualitative easing disposition. Yet Kuroda-san still hasn't flip the switch on the perspicacity of the policies trajectory in Japan. Have to be proactive when he does intentionally starts to end QE because the velocity of the most important bond market in the world, which is the global benchmark 10Y US treasuries, could get hot.

In addition to Kuroda-san's responsibilities at BOJ, there are a couple of interesting market charts that BOJ officials which I suspect are paying closely attention to. One is the global bond market benchmark, the 10Y USD treasury yields for inflation factors which is part of BOJ's unofficial dual mandates. Secondly is the market volatility measurement of the largest stock market in the world, the SnP 500 index. Volatility of US stock markets connects as well as correlates to certain degree of how Nikkei 225 is driven and how it also affects the Yen foreign exchange forces. This a big deal at BOJ in reference to Japan's connection of being one of the bigger trading partners to America.

First up is the 10Y US bond yield...

https://framapic.org/LwkO5NuXBwGj/ZTXxC7Fdw5ZX.jpg

This is what Kuroda-san and other BOJ officials are also paying attention to in addition to their other monetary accountabilities. It fairly apparent that the 3% zone on the chart is a very significant psychological inflection point for the big boy participants at this moment in the market. For now, until US has shown some clear evidence of sizzling growth prospects as well as earnings to warrant of further hikes by the Federal Reserve, it will probably stick around this zone. BOJ is closely watching this important psychological price line to get hints on how to proceed with their challenging exit in terms of inflation related factors. If 3% threshold on rates does give way, it will not be good for global stocks in the short term (about 1 to 6 months) due to probably temporary algorithmic momentum chasing sell-off of the bond markets.

The other significant market chart that also the BOJ is paying close attention to in order to gauge global investors psychological perpectives ie. fear is the VIX. This is where the other part of the unofficial dual mandate by the BOJ plays the part, which is global price stability.

https://framapic.org/fRyFESTS2gDY/t8b0t2TAjTfn.jpg

It's not an actual volatility, as might be calculated by the distribution of data from its mean. VIX is an implied volatility of the biggest stock market in the world, the SnP 500 index. Implied vol more than anything references the level of certainty that market makers and liquidity providers have or don't have about the future. 

A liquidity provider/market maker prices the option with some equitable inputs as money managers makes decision to call for an option hedge against probable drawback in stocks. This abstract but substantial variable is called implied volatility. When emerging of uncertainty arises, the implied volatility value includes a (periodically considerably healthy) premium over actual volatility. To put it simply, if you're a market maker/liquidity provider and you think there is significant risk emerging for a (as an example) a sharp downturn in stocks, you will nick the purchaser of that protection more, similar to what an insurance company would rate a client a bit more for the homeowner's policy in an area more likely to see earthquakes, floods, or typhoons. And they hastily will boost the insurance premium if they are uncomfortable by the risk of a violent downward action in stocks.

With that in mind, there have been some violent spikes in implied vol in the last 10 years or so. Pessimistic emotion and psychology by various market players are almost always temporarily short-term. Optimistic outward looking in the big picture is almost always as better bet overall.

In fact, VIX has been back to historic lows in volatility even with all the chaos happening throughout the world by seeing plenty of risks and crises. Big contributing part of this, is that central banks have been standing by, throughout this critical period, intervening to restore stability. But central banks help is slowly disappearing, if not probably will end fairly soon. Monetary stimulus driven economy will be handing down the economic growth baton to a fiscal stimulus and structural reform driven economy. This for sure, as a result of torch passing will create more and new higher vol environment than we've seen over the last 10 years or so in the stock markets.