Two years after introducing “unprecedented” qualitative and quantitative easing under Gov. Haruhiko Kuroda, the Bank of Japan maintained its monetary policy and assessment of the economy in its latest policy board meeting this week. Attention continues to focus on the target of an annual 2 percent inflation rate in two years — set out by Kuroda and the Abe administration in their fight against deflation but now widely deemed unlikely, and speculation lingers that the central bank might introduce another additional easing to achieve that. But is it really a valid target to pursue in the face of all the costs and problems associated with the policy?
The BOJ policy under Kuroda is credited with sharply pushing down the yen’s exchange rate, which stood around ¥80 to the dollar in mid-2012 and now hovers around ¥120. The yen’s fall led to record earnings at many of Japan’s global firms, and the robust corporate profits have pushed up share prices, with the Nikkei average on the Tokyo Stock Exchange briefly topping 20,000 on Friday for the first time in 15 years. For two years in a row, profitable firms offered their employees decent wage increases not seen for years.
There are questions, however, as to whether the BOJ’s operation, which centers on its massive purchase of government bonds from financial firms, has in fact stimulated the nation’s economic activities as much. The monetary base, or the combined balance of currency in circulation and commercial financial institutions’ current account deposits at the BOJ, hit a record ¥295.86 trillion at the end of March — up 34 percent from a year earlier and more than meeting the central bank’s goal of doubling the amount in two years. But the outstanding amount of the financial firms’ deposits in the central bank accounts also surged 56 percent from a year earlier to hit ¥201.56 trillion. A large part of the money injected into the system kept accumulating in the banks’ accounts at the BOJ without resulting in sharp increase in lending to businesses.
In pursuing the 2 percent inflation target within the two-year time frame, the BOJ has emphasized the need to change the public mindset that has set in since the 1990s as the nation was gripped by deflation. The target, backed up by the massive bond purchase, was billed as important to demonstrate the central bank’s commitment to ending deflation — and to encourage people to spend and businesses to invest by raising their expectations that prices would soon be rising.
The consumer price index in April 2014 — a year after the BOJ launched the new policy — rose 1.5 percent year-on-year, not including the effects of the 3 percentage point hike in the consumption tax. But much of the price increase was attributed to the higher cost of imports due to the yen’s steep fall induced by the BOJ’s policy. And people cut back on spending as prices rose faster than wage hikes. Consumer spending, which accounts for 60 percent of Japan’s gross domestic product, has continued to slump since the tax hike, causing the economy to shrink for two consecutive quarters to September. The subsequent recovery remains weak.
Facing the slump in consumer spending and a slowing pace in the rise of prices due to falling crude oil prices, the BOJ expanded its monetary stimulus last October, which drove the yen down even lower against the dollar and gave an additional impetus to the stock market. However, the yen’s accelerated fall offset part of the gains from the declines in crude oil prices, which would have been a boon for Japanese consumers.
In a speech he gave in Tokyo last month, Kuroda said it was an “epoch-making change” that prices and wages are rising in Japan after so many years of deflationary pressures. In fact, the year-on-year rise in consumer prices, not including the impact of the consumption tax hike, has been slowing down, and in February the prices were nearly flat compared with a year before. Kuroda himself has acknowledged that prices may dip into the negative territory in coming months on year-on-year basis depending on oil prices.
The central bank remains bullish that the nation is on the way out of deflation — that prices would pick up again once the effects of oil price declines start to wear off in the latter half of this year. However, consumer prices in February that exclude energy, food and the tax increase were still up by a mere 0.3 percent from a year before, raising doubts if the slowing price movements can be blamed on the fall in oil prices.
Speculation remains that the BOJ might resort once again to additional easing measures. Kuroda told a news conference after the latest policy board meeting that he remains committed to achieving a 2 percent annual inflation rate “in about two years,” and that the central bank “would not hesitate to adjust” its policy when the underlying price trend changes.
But it would be unwise for the central bank to cling to the 2 percent inflation target without taking into account the negative impacts of such a step, including a further fall in the value of the yen and its repercussions on consumers and businesses. Ending deflation is a priority for Japan, but would achieving that by pushing up costs for consumers and companies be truly good for the economy?
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.