BOJ must proceed with caution

The Bank of Japan’s new leadership will officially start today as the Upper House on March 15 approved the Abe administration’s nomination of Mr. Haruhiko Kuroda, president of the Asian Development Bank, as its governor and Mr. Kikuo Iwata, a Gakushuin University professor, and Mr. Hiroshi Nakaso, a BOJ executive director, as its deputy governors.

Mr. Kuroda is expected to adopt a policy of “bold monetary easing” to pull the Japanese economy out of its long-term deflation. He declared that he will do anything to achieve an inflation target of 2 percent within two years. But the new BOJ’s new policy carries risks. People should strictly watch its effects.

The BOJ agreed to adopt a 2 percent inflation target in January in an accord with the government. But raising price levels by that margin should not be the BOJ’s ultimate goal.

Mr. Kuroda and his two deputy chiefs should realize that the real goal is expansion of business activities that will lead to increases in workers’ wages and a decrease in unemployment.

Under Mr. Kuroda’s leadership, the central bank is likely to expand the monthly amount of government bonds it buys and to continue such purchases indefinitely.

Currently the BOJ is buying only short-term (one-to-three-year) government bonds. But Mr. Kuroda has suggested that the BOJ may start buying longer-term government bonds.

He also said that the BOJ’s current policy of increasing its asset purchase fund to ¥11.1 trillion in and after 2015 is insufficient.

The monetary easing policy is aimed at increasing the amount of money circulating in the economy and thus inducing lower interest rates so that businesses and individuals can borrow money easily.

In theory, if businesses increase equipment investment and individuals expand consumer spending, price levels and profits will go up, which then will lead to expansion of wages and employment. The government hopes that setting the inflation target will create an expectation that prices will go up in the near future, which will then activate consumption. But there is no guarantee that this “virtuous circle” will take place as expected.

The problem is that businesses are having difficulty finding good opportunities for equipment investments and that a large amount of money remains at financial institutions.

Even during the economic bubble in the late 1980s, the annual average price rise was no higher than 1.3 percent. An attempt to raise price levels by 2 percent through monetary policy could cause undesirable side effects, such as surplus money being used for speculative purposes, causing bubbles.

With the Abe administration’s reflationary policy, stock prices have risen and the yen has weakened. But high stock prices have nothing to do with raising ordinary citizens’ income and the cheap yen has increased the price of imported goods.

The BOJ’s unlimited purchase of government bonds could lower trust in Japan’s financial discipline and trigger higher long-term interest rates, increasing the government’s financial burden. The new BOJ leadership cannot be too cautious in its actions.