As investors remain fixated on an impending rate rise by the US Federal Reserve, the Bank of Japan (BoJ) may “surprise” the market by beginning to taper its quantitative easing policy, says AllianceBernstein (AB).
Speaking in Sydney yesterday, AB senior economist of the Asia Pacific, Guy Bruten, said there are other developments within the “central banking world” that may “surprise” investors.
"We've been expecting the US Federal Reserve to raise rates for some time now and to some extent that's been factored into markets. But we don't think that investors are sufficiently factoring in the possibility that the [BoJ] might move next year to taper its quantitative easing policy."
Mr Bruten argued that in the face of patchy economic data and low inflation, many investors expect the BoJ to continue on an easing path.
“[The BoJ governor is] asking people to look at the behavioural change in the inflation environment, where [there has been] two annual wage shredding rounds out of Japan which have delivered increases in base salary for the first time since the mid to late 1990s.
“I think there is an underestimated risk that as we roll into the first half of next year, there’s a lot more discussion about tapering in Japan. That will come as a big surprise."
Mr Bruten said the BoJ’s nod towards tapering comes at a time when the line between fiscal and monetary policy is becoming increasingly blurred.
“To me that means there is a lot more potential for experimentation – some countries getting it right, some countries getting it wrong."
As a result, experimentation with monetary policy is likely to result in volatility.
“We’re at the start of a period, which could last for another five years I guess, where there’s likely to be more volatility stemming from policymakers doing different things,” said Mr Bruten.
“Traditionally when we’ve gone from one policy regime to another, the transition tends not to be very smooth and I think that’s likely to be the case this time round.”
In terms of Australia’s monetary policy, Mr Bruten said the Reserve Bank of Australia (RBA) isn’t in a “particular hurry” to cut rates further.
However, in line with his expectation of higher unemployment throughout 2016 and the potential for a dip in inflation, the RBA may consider cutting rates in mid-2016.