Experts urge BOJ to draft exit strategy

by Tomoyuki Tachikawa

Kyodo

Despite lingering market pressure on the Bank of Japan to take further easing steps, its Group of 20 counterparts might not welcome the central bank’s next move.

With concern mounting about how the BOJ’s unprecedented purchases of government bonds and risky assets will impact global markets, the G-20 finance chiefs might pressure the BOJ in the near future to clarify how it will phase out the deflation-busting measures.

The G-20 finance ministers and central bank governors — who are struggling to prevent the Russia-Ukraine crisis from hurting the world economy — wrapped up their two-day meeting Friday in Washington by emphasizing in a communique that they will “continue to provide clear and timely communication” of their monetary policy actions.

In this context, some experts have expressed caution that the BOJ may draw international criticism if it takes additional credit easing measures that could have strong side effects without preparing an exit strategy.

As the U.S. Federal Reserve has been asked by emerging economies at the G-20 gathering to communicate with the financial markets about how fast it will taper its own giant monetary stimulus program, the BOJ could soon find itself in the same situation.

Many observers say the BOJ is likely to take action early this year to achieve its 2 percent inflation target because the economy is widely expected to stall following the April 1 consumption tax hike — Japan’s first in 17 years.

On Tuesday, after the BOJ decided to leave its aggressive monetary easing policy in place, Kuroda said further easing was not on his mind. “We are not currently thinking about additional easing” because the economy is steadily on course to attain the 2 percent inflation target by spring 2015, he said.

The government said last month that the core consumer price index, which excludes fresh foods but not energy, rose 1.3 percent in February from a year earlier, rising for the ninth straight month. Kuroda said the BOJ will “not hesitate to make adjustments if necessary.”

Takeshi Minami, chief economist at Norinchukin Research Institute said, “There are few people who believe inflation will really rise to 2 percent in fiscal 2015, with expectations persisting that upward pressure on prices will ease” as the tax hike is set to cool domestic demand.

“Gov. Kuroda is likely to consider and carry out further monetary easing around summer in 2014, when price rises may show signs of peaking out,” Minami added.

Indeed, many analysts say the core CPI, minus the inflationary effect of the 3-point tax increase to 8 percent, is forecast to climb only 1 percent in fiscal 2014 ending March 2015, meaning the BOJ would fail to achieve the inflation target. But the bank is not in a position where it can decide alone whether to relax its monetary grip, given that its policy change will affect financial markets across the globe.

A few months after Prime Minister Shinzo Abe took office in December 2012, his economic program, dubbed “Abenomics” and centered on the BOJ’s aggressive monetary easing, sharply weakened the yen and prompted the G-20 finance chiefs to explore ways to avoid a potential “currency war.”

Some developing and emerging economies apparently lambasted Japan for intentionally driving down its currency by pressuring the BOJ to take drastic action. Kuroda was Abe’s hand-picked choice for BOJ chief and his predecessor left before his tenure was due to expire.

Japan Bank for International Cooperation Gov. Hiroshi Watanabe said additional BOJ easing measures would not be supported by the United States, which is gradually reducing its own bond purchasing program.

“I’m not sure whether it is good for the United States and Japan to look in much different directions,” Watanabe, a former vice finance minister for international affairs, said in a meeting with reporters earlier this month. “I don’t think the United States will support” further BOJ easing.

On April 4 last year, the BOJ embarked on an aggressive, well-advertised monetary easing program designed to end nearly two decades of deflation. The new program, coinciding with Kuroda’s appointment as BOJ chief, features unprecedentedly large purchases of government bonds aimed at doubling Japan’s monetary base to ¥270 trillion by the end of this year.

In light of the side effects of the radical program, which could also take a toll on the global economy, the BOJ must map out an exit strategy from what it calls “quantitative and qualitative monetary easing,” pundits said.

Some central banks have created a framework for avoiding the adverse impact of such policies, former BOJ Deputy Gov. Kazumasa Iwata said in a recent interview. “The BOJ also ought to set certain conditions and mechanisms toward the normalization of its current policy,” said Iwata.

Even within the BOJ, some policymakers have started to argue that the bank should not try to pump more money into the economy because there is a risk this will impede the financial markets.

“If the current large-scale monetary easing policy were to be protracted or such policy strengthened by additional measures, the associated side effects would instead outweigh the positive effects, and this would undermine economic stability in the long run,” BOJ Policy Board member Takahide Kiuchi said last month.