The Bank of Japan has begun shifting its focus from supporting growth to ways of phasing out its massive stimulus, taking first tentative steps towards a potentially momentous move for the world economy.
Current and former central bankers familiar with internal discussions say an informal debate is under way on how to prepare for an exit from the BOJ's 13-month-old "quantitative and qualitative monetary easing."
The stimulus is a centerpiece of Prime Minister Shinzo Abe's campaign to end two decades of deflation and fitful growth, and BOJ Governor Haruhiko Kuroda has vowed to keep cheap cash flowing until his 2 percent inflation target is in plain sight.
But with inflation now past the half-way mark and signs that the economy has weathered last month's sales tax increase, Japanese central bankers are already thinking about the next chapter.
First of all, Kuroda and his team are keen to avoid market confusion and volatility that the U.S. Federal Reserve triggered in May 2013 when it first signaled the possible "tapering" of its extraordinary stimulus.
With the BOJ churning out 60-70 trillion yen per year ($589-687 billion), withdrawal symptoms could be similarly acute and the lesson for the BOJ is that signaling a tapering too soon or being too specific could backfire.
With that in mind, the BOJ has no plans to trim the stimulus or publicly suggest the eventual drawdown any time soon, say those familiar with the internal debate.
But whereas weeks or months ago that debate would center on the potential need for more easing, now there is a strong sense within the BOJ board that the stimulus so far has worked well and the next step, albeit distant, could be policy tightening, not further easing.
Deputy Governor Kikuo Iwata underscored that shift, reminding markets that the 2 percent inflation goal worked both ways.
"The BOJ's current policy intends to prevent not just deflation but inflation from well exceeding 2 percent, such as to 4 percent or 5 percent, for a medium- to long-term period," Iwata told a seminar on Monday.
Hideo Hayakawa, a former top BOJ economist who maintains close contacts with those inside, says the central bank needs to clarify what will it do after the battle with deflation is won.
"If 2 percent inflation comes into sight, the BOJ should taper its asset purchases," Hayakawa, a senior executive fellow at private think-tank Fujitsu Research Institute, told a Reuters Investment Summit last week.
In public, Kuroda has become more vocal about the need for government structural reforms, which shows he wants the BOJ to shift from boosting economic demand to playing a supporting role as Abe promises deregulation to boost Japan's growth potential.
Keen to shore up public confidence in the BOJ's inflation goal, Kuroda regularly brushes off questions about an exit strategy saying the focus should remain on battling deflation.
There is no hard deadline for curtailing asset purchases and Kuroda keeps reminding investors that the BOJ will not hesitate to ease further if economic recovery appears at risk.
But central bankers are now expressing more confidence in their policy and if the economy keeps improving the debate will intensify about how long the BOJ should maintain its stimulus after it reaches the two-year mark in April 2015.
Right now, there is no agreement yet among the nine policy board members on that.
Some, including Kuroda and former International Monetary Fund economist Sayuri Shirai, stress the "open-ended" nature of the policy. They argue the BOJ can keep buying government bonds and other assets until there is convincing evidence that 2 percent inflation will be sustained, say people familiar with the internal debate.
Former market economist Takahide Kiuchi, however, wants the current framework to be reviewed next April because he fears loading up on too much debt will make an exit difficult.
Since the launch of its extraordinary asset-buying scheme in April 2013, the BOJ has been scooping up about 70 percent of newly issued government debt, including nearly all new 10-year benchmark bonds sold by the government.
Public remarks and private conversations with some of the central bankers suggest the rest of the board, including two former business executives, stands somewhere in between.
According to central bank insiders, at least two policymakers believe the BOJ should stay "ahead of the curve" and seek the exit once there are early signs that inflation is approaching 2 percent.
Such debate may have been academic when inflation was well below 2 percent, but will matter more if prices near the target.
"Bond market players don't want to think about an exit and don't see any need to think about it yet," said Noriatsu Tanji, bond strategist at Barclays Securities Japan, explaining why yields have stayed low despite an improving economy.
"But things may change if consumer inflation exceeds 1.5 percent around autumn of this year," he said. That will prompt investors to price in the chance of a future tapering.
Change of heart
The key concern, for now, is to prevent premature expectations of tapering from disrupting the bond market, where the government continues to pay 0.6 percent interest on 10-year bonds despite its heaviest debt load in the industrial world.
BOJ officials do not want to discuss how long the stimulus may last and what might trigger its withdrawal, which in part reflects considerable differences within the BOJ on how to communicate its plans.
Some say the BOJ should clarify the conditions under which tapering might start, possibly in October when it updates its twice-yearly economic projections.
"The BOJ may need to change its message to markets at some point later this year," said a person familiar with the bank's thinking. "The key is to avoid a spike in bond yields."
Others worry that even mentioning a possibility of an exit could jolt markets.
Yet the very fact such discussions are taking place marks a change for the BOJ and Kuroda, whose prime concern has long been that the stimulus could be scaled back prematurely.
Last month, he surprised markets by saying the BOJ's massive easing has boosted demand enough to essentially eliminate any slack in Japan's economy.
At a news conference last week followed by interviews with two major business newspapers, Kuroda went further, stressing that demand has been revived enough and it was now up to the government to remove supply bottlenecks by bringing more women into the workforce and making it easier to start new businesses.
Some academics argue the BOJ is too coy about tapering and should start talking about it now rather than wait until markets start fretting about a possible exit.
"They should be talking about tapering at a minimum, and they should begin preparing financial markets for a regime after 2 percent, a shift from stimulating aggregate demand to stimulating aggregate supply," Harvard economist Dale W. Jorgenson told the Reuters Summit.
"It's not too soon to begin managing expectations of changes that will take place within next 12 months."