The Bank of Japan’s unprecedented monetary easing operation under Gov. Haruhiko Kuroda has entered its fifth year. Its target of 2 percent annual inflation, which the central bank was initially confident of achieving within two years, is still nowhere in sight as Kuroda has less than a year to go before his term as BOJ chief expires. The experience of the past four years shows that the BOJ policy alone cannot end the deflation that the Abe administration has vowed to bust.
Kuroda says it is still premature to discuss an exit from the policy. But the monetary stimulus, which involved massive purchases of government bonds and other assets by the central bank, and introduction of a negative interest rate policy, has had undesirable side effects. The bond purchases kept long-term interest rates around zero, which reduced the government’s cost of borrowing and could diminish its sense of crisis over the need for fiscal reconsolidation. The BOJ’s purchase of investment trusts as a monetary easing vehicle distorts stock and real estate markets.
The bank should recognize these risks from the policy and explore a path toward normalizing its monetary policy.
What was dubbed the monetary easing “of another dimension” was launched in April 2013, shortly after Prime Minister Shinzo Abe installed Kuroda as new BOJ governor to carry out the administration’s vow to eliminate deflation in this country. The policy consisted of BOJ purchases of government bonds to the tune of ¥50 trillion annually — an amount later boosted to ¥80 trillion — and increase in its buying of exchange-traded funds (ETF) and real-estate investment trusts (REIT), which leads to the pushing up of share prices and the real estate market. It was based on a theory that more money pumped into the economy through the BOJ’s asset purchases would raise people’s inflationary expectations, thus pushing up prices.
The BOJ expanded the program after growth of the economy lost steam following the April 2014 hike in the consumption tax. When the yen’s downtrend under the policy was reversed early last year amid growing global economic uncertainties, the BOJ resorted to the negative interest rate policy by charging fees on commercial banks’ deposit in their central bank accounts.
Despite these efforts, the targeted 2 percent inflation remained as distant as ever. In 2016, average consumer prices fell 0.3 percent from the previous year for the first decline since 2012. The consumer price index rose a meager 0.2 percent in February for the second straight monthly increase attributed to recovery in crude oil prices — after declining for 13 consecutive months. The BOJ’s inflation target meanwhile kept being pushed back.
The BOJ’s monetary stimulus is credited with making the yen fall against the dollar under Abe’s watch — inflating the earnings of export-oriented companies and pushing up share prices — and reinvigorating real estate transactions. The employment situation improved — the jobless rate of 2.8 percent in February was the lowest since 1994. However, consumer spending remains weak since the 2014 tax hike — per-household spending in February fell 3.8 percent from a year earlier for the 12th monthly decline in a row. Consumer appetite to spend continues to be subdued as higher corporate profits have not significantly raised wages. As a result, the effects of the BOJ’s current policy in raising prices remain unproven four years on.
The central bank kept its monetary policy intact in the latest Policy Board meeting last month. In a recent speech in Tokyo, Kuroda said he sees no reason yet to ease up on the policy, noting there’s still a long way to go for the 2 percent inflation target.
But while the policy’s effects on raising prices remain unclear, it seems clear that the government, now saddled with more than ¥1 quadrillion in debt, benefits from the policy in that the near-zero long-term interest rates maintained by the BOJ’s massive bond purchases lowers its cost of incurring more debts. That carries the risk of reducing the government’s sense of urgency over rebuilding the nation’s fiscal health.
The BOJ’s large-scale purchases of ETFs meanwhile distorts the stock market by shoring up share prices in ways that do no reflect the performance of individual companies or the economy, and is effectively turning the central bank into a major shareholder in large numbers of listed companies, creating potential problems in terms of the governance of those firms.
The central bank and the Abe administration should reconsider whether such a monetary policy continues to be justified for such an extended period of time.
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