Bank of Japan’s easing policy set to stay for extended period
THE BANK OF JAPAN’S decision to maintain its policy of massive monetary easing suggests the inflation target of two per cent remains a distant prospect and that the policy is here to stay for an extended period.
The central bank made the decision at a monetary policy meeting last Thursday, about one year since its focus shifted from the volume of government bonds it purchased to the level of long-term interest rates.
“Long-term interest rates are moving stably at around 0 per cent,” BOJ Governor Haruhiko Kuroda said at a press conference after the bank’s meeting. Kuroda indicated the bank’s current policies were sufficient for achieving the inflation target.
Since April 2013, the central bank has continued a massive monetary easing policy under which it has purchased large amounts of government bonds. In September last year, the bank set a new target of guiding longterm interest rates within a range of around 0 per cent.
It decided to flexibly adjust the volume of bonds it purchased depending on fluctuations in interest rates.
Steering long-term interest rates was an extra- ordinary method even for a major central bank to adopt, and some observers concerns effects.
However, even as markets fluctuated wildly due to reasons including the launch of the administration of US President Donald Trump and heightened tensions over North Korea, the BOJ has stemmed a surge in interest rates through steps such as three fixed-rate operations in which the bank purchases unlimited volumes of government bonds with a designated yield.
In contrast, when it decided the rate had fallen too much, the bank reduced the volume of government bonds it purchased.
“Our efforts to steer interest rates have gone better than expected,” a senior BOJ official said.
Kuroda also said the real economy is improving more than he had anticipated, emphasising the results of the bank’s actions. Japan’s real gross domestic product grew in the April to June period for the sixth consecutive quarter of expansion. Corporate earnings also have climbed to record-high levels and the at first expressed over the policy’s unemployment rate has dropped significantly.
But one miscalculation has been that prices have remained sluggish. In July, the year- onyear rate of increase in the consumer price index (for all items except fresh food) was 0.5 per cent. The upward trend in prices continues to be weak. Employment market conditions have tightened in terms of the supply- demand balance, with a growing sense that the nation is facing a labour shortage.
“Some companies have changed their business model, such as by ending night-time operations,” Kuroda said. “Some aspects have hindered wage increases from being passed on through higher prices.”
The governor indicated he was aware prices had increased by less than he had expected one year ago.
The BOJ’s last Thursday meeting was the first for its new members, appointed after the terms of their predecessors expired, to attend. Among them was Goshi Kataoka, believed to be an advocate of aggressive easing, who cast a dissenting vote against the bank’s action for market operations, saying, “The possibility of the rate of change increasing toward two per cent from 2018 onward was low at this point.”
Deep-rooted concerns remain over “side effects” of the bank’s unusual monetary policy. Under the prolonged massive easing programme, the bank held government bonds worth more than ¥ 430 trillion as of the end of June.
For the first time, the proportion of outstanding national bonds possessed by the central bank topped 40 per cent, leaving the bank’s financial foundation increasingly vulnerable to shifts in bond prices.
The bank’s continued monetary easing, which keeps a squeeze on long-term interest rates, also benefits the debt-laden central government by lightening the state’s interest payment burden.
Ensuring the nation’s finances are healthy is essential for preserving confidence in government bonds. However, with the House of Representatives election scheduled for as soon as October, political parties are becoming unable to draw up policies that would inflict pain on voters by cutting expenditures and securing tax revenues.
“Being able to uphold fiscal
Since April 2013, the central bank has continued a massive monetary easing policy under which it has purchased large amounts of government bonds.
discipline is important for the nation’s finances,” Kuroda said. “It also will have an impact on monetary policy, so I’m certainly watching closely.” — WPBloomberg