The Bank of Japan’s decision last week to expand the scope of its asset purchase program not only seemed to disappoint the market by apparently exposing the limitations of its monetary stimulus but also effectively represented the central bank’s attempt to intervene in the management decisions of private-sector firms through monetary policy.
In expanding its annual purchase of exchange-traded funds (ETF) by around ¥300 billion from the current pace of about ¥3 trillion beginning in April, the BOJ said it would buy ETFs composed of stocks issued by companies that are “proactively making investments in physical and human capital.” The new policy resonates with the repeated calls by the administration of Prime Minister Shinzo Abe on businesses to spend more of their increased profits on wage hikes and capital investments to shore up the economy.
BOJ Gov. Haruhiko Kuroda said the bank will extend as much support as it can to encourage companies to make the investments and raise the wages of their workers. Kuroda said the annual spring wage negotiations between the management and labor unions at major firms “influence consumer spending and price trends” and that the BOJ is “strongly interested” in the outcome of the talks in its bid to achieve a 2 percent annual inflation target — a commitment that he made when he launched the monetary stimulus to end deflation.
The BOJ said the new measure, along with other steps announced after its latest two-day Policy Board meeting, were not intended as additional easing of its monetary policy but are meant to “help implement asset purchases smoothly” and enable the central bank to “make adjustments swiftly if needed.” It kept unchanged the overall program of increasing the nation’s monetary base by ¥80 trillion annually. The reaction of the Tokyo stock market on the day the BOJ’s move was announced — where the Nikkei 225 index initially shot up by more than 500 points but closed 366.76 lower — appeared to reflect market players’ disappointment that room for additional easing steps by the BOJ, which could trigger a further decline of the yen against the dollar and push up import costs, is dwindling.
The market’s response aside, the BOJ’s move appears to be entering the realm of meddling — even indirectly — with the business decisions by private-sector companies. Its announced policy of purchasing ETFs composed of stocks of firms actively making capital investments and raising wages would mean that such companies can expect to see the price of their shares go up. It’s aimed at prodding the companies to invest more and raise wages by driving up their share prices — just like the Abe administration has done for the past three years by offering pro-business policies such as corporate tax cuts.
Tasked with shooting the “first arrow” of Abe’s trademark economic policies, the BOJ launched the “unprecedented” monetary stimulus through the massive asset purchases in April 2013. The policy led the yen to fall sharply against the dollar, which drove up the earnings of major Japanese firms to record levels and caused the surge in share prices in the Tokyo market. But the administration’s repeated prodding on these companies to translate their increased profits into wage hikes and new investments has yet to produce much in the way of stimulating consumption. Though big companies have offered the sharpest pay raises for their employees in years, the net wage gains of workers in general have either been negative or minuscule as prices rose faster than pay, and consumer spending remains weak after slumping heavily in the wake of the April 2014 consumption tax hike.
Some members of the Abe administration point out that the companies making huge profits thanks to the yen’s fall are not investing enough and instead are accumulating this money as retained earnings. But investments and wages are among the crucial management decisions that companies make by weighing the economic conditions and market prospects ahead, not at the urgings from the administration in power. It’s not clear whether the BOJ’s fresh attempt will make much of a difference.
The BOJ’s purchase of ETFs has the effect of directly pushing up share prices. Such a policy may make sense as a short-term measure when market sentiment is weak and share prices are underperforming compared with corporate earnings. But the Tokyo Stock Exchange does not appear to be in such a condition. Rather, it is high time that discussions begin for scaling back such steps — which smack of being aimed at shoring up share prices.
The decision to expand the ¥3 trillion annual scope of the BOJ’s ETF purchases by ¥300 billion was reportedly opposed by three of the BOJ’s nine Policy Board members with voting rights. The split decision appears to suggest that the latest move is met with reservations even within the central bank.
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