The Bank of Japan under its new governor, Mr. Haruhiko Kuroda, came up with a bold monetary easing policy Thursday, aimed at achieving a 2 percent inflation target in two years. The BOJ will double the monetary base — the amount of cash circulating in the market and commercial banks’ reserves at the BOJ — in two years, start buying government bonds of all maturities including 40-year bonds, and extend the average remaining maturity of government bonds in its possession from less than three years to about seven years.
Gov. Kuroda’s declaration that the central bank will “enter a new phase of monetary easing in terms of quantity and quality” shows his strong determination to pull the Japanese economy out of its long-term deflation.
While it is hoped that the BOJ’s new policy will lead to increased personal consumption and capital investment, the bold monetary easing carries the risk of causing asset bubbles. The ultimate goal should be rises in workers’ wages and expansion of employment — not rises of prices, per se. The central bank should prevent, at any cost, a situation in which inflation occurs without improvements in wages and employment.
Under the new policy, the monetary base will increase by ¥60 trillion to ¥70 trillion each year. Its balance will double from ¥138 trillion at the end of 2012 to ¥270 trillion at the end of 2014. Monthly purchases of long-term government bonds by the BOJ will rise from ¥4 trillion so far to ¥7 trillion. The amount of such bonds held by the BOJ will grow from ¥89 trillion at the end of 2012 to ¥190 trillion at the end of 2014.
The central bank hopes that its measures will lead to lowering of long-term interest rates and an increase in loans from banks to businesses and consumers. But demand for loans has been at a low level since businesses have difficulty in finding profitable investment opportunities.
Monetary policy cannot solve everything. The government must develop policies to help prompt businesses to expand capital investment, and accelerate research and development to produce attractive products.
The BOJ will buy through the market 70 percent of government bonds issued each month. To ensure such bond purchases, the central bank has temporarily shelved its “bank note principle,” which limits the amount of long-term government bonds in its possession to below the outstanding balance of bank notes in circulation. By taking advantage of the suspension of this rule, the government may issue bonds without restraint.
Gov. Kuroda said that the BOJ has no intention of financing the government. But there is no guarantee that the market will continue to trust his statement. If trust is lost, government finance will collapse. It is imperative that the BOJ work out rules that will help maintain the market’s trust in it and the government as well as measures to prevent side effects such as a sudden rise of long-term interest rates and asset bubbles.