The key to predicting the Bank of Japan’s monetary policy for 2018 will depend on who is appointed its next governor, financial and market experts say.
Gov. Haruhiko Kuroda, whose term expires in April, is held in high regard by Prime Minister Shinzo Abe, who has said “I trust his prowess.”
Many market watchers expect Kuroda to stay on.
The BOJ is likely to maintain its policy on short- and long-term interest rate targets and continue its massive asset buying if Kuroda remains at the helm.
But how to normalize the central bank’s unorthodox policy is likely become a hot topic due to its adverse side effects, which include a negative interest rate.
Kuroda and Abe attended a meeting of Keidanren (Japan Business Federation), the nation’s most powerful business lobby, on Tuesday, the fifth anniversary of Abe’s return as prime minister.
“In order to ensure an end to the long-standing problem of deflation, we need to strengthen the positive economic cycle further in 2018,” Abe told the meeting.
“We still have some time to go before hitting our 2 percent inflation target,” Kuroda said. “We’ll continue our powerful monetary stimulus measures tenaciously.”
Since Kuroda took office in 2013, the BOJ has eased policy every year except last year.
“The economy is faring well. The current situation does not require any additional measures,” a BOJ executive said.
But some criticize Kuroda for failing to hit the inflation target.
Japan’s ambassador to Switzerland, Etsuro Honda, an economic adviser to Abe, has said the BOJ’s leadership should be revamped because it has failed to halt deflation.
A new BOJ policymaker has been dissenting at its policy meetings since September to call for additional easing measures.
Banking industry officials and others have expressed concern about the fallout from the radical policy. Regional banks are particularly at risk as profitability dwindles as a result of the slimmer interest margins.
Kuroda himself discussed the topic in a speech in November, referring to the “reversal rate” theory that excessive drops in interest rates work to reduce the positive impact of monetary easing.
The BOJ is likely to keep its policy in place until deflation is eliminated. But Tsuyoshi Ueno, senior economist at the NLI Research Institute, said, “The BOJ should examine how to reduce the negative side effects.”