The Bank of Japan had a difficult start into 2016. The latest data shows that inflation in the last quarter of 2015 was lower than expected. Furthermore, doubts are increasing about the recovery of the economy. At the end of January, BOJ Gov. Haruhiko Kuroda surprised markets by announcing negative interest rates for certain commercial bank deposits at the BOJ. On March 1 Japan started to sell government bonds with a yield below zero. Market observers expect even bolder steps later this year.
What are the chances that Kuroda's policies to lift inflation will be successful? In this article I argue that it is time for the BOJ to rethink its strategy. Continuing unconventional monetary policy is risky as success becomes more and more unlikely and an exit more and more difficult.
The stated goal for the aggressive monetary policy of the BOJ is to achieve 2 percent inflation. We know from basic macroeconomics that inflation can have different sources. One is an upward shift in aggregate demand; another one is an increase in the money supply. Aggregate demand in Japan has been sluggish.