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BOJ must deal with side effects of different-dimension monetary easing

The Yomiuri ShimbunThe Bank of Japan’s different-dimension monetary relaxation has been effective in promoting economic expansion, but at the same time, it is beginning to produce adverse side effects in many areas. The new task facing the central bank is how to secure a balanced policy.

To achieve the target of 2 percent price increases, Bank of Japan Gov. Haruhiko Kuroda remains unchanged in adhering to a large-scale monetary easing policy that has been maintained for close to five years.

On the other hand, market players are increasingly inclined to believe that the monetary relaxation policy will soon move toward a contraction. This is because the economic expansion is now the second-longest in the post-World War II period, and progress is also being made in improving the employment situation.

At the bank’s Monetary Policy Meeting held last month, multiple members referred to a reconsideration of the relaxation policy.

The growth rate of consumer prices is still less than 1 percent. However, the U.S. and European central banks, which have set price targets at a level equivalent to that of Japan, are moving to scale down their monetary relaxation before achieving their goals.

The Bank of Japan will be tested over its readiness to even more flexibly reconsider its policy line, too.

The harmful effects of the large-scale relaxation are beginning to appear in many fields.

One emerging view holds that the negative interest policy, which has been in place a full two years this month, could strain the financial situation of banks and have the opposite effect of undermining their financing function.

Get back on right track

Through its quantitative easing policy, the bank continued to buy government bonds, and as a result, its ratio of holdings reached 40 percent of the total amount of outstanding government bonds. This has narrowed the options for fund management by institutional investors.

Caution needs to be exercised about what would amount to a “mini-bubble,” in which a massive amount of money that has nowhere to go could lead to soaring land prices in large cities.

The central bank has purchased exchange-traded funds of up to ¥6 trillion per year, with some saying that the stock market appears to be increasingly like a “government-controlled market.”

It is no easy task to reconsider a monetary relaxation policy that has proceeded this far. In the United States, stock prices plunged on Friday, in reaction to the observation that the U.S. central bank will likely bring forward an interest rate hike due to an improvement in the employment situation. It is necessary for the Bank of Japan, too, to exercise caution in this respect.

One factor behind the lengthening of the relaxation policy is the assertion of “reflationists” who believe it is possible to end deflation through bold monetary relaxation. The central bank initially stated that it would accomplish a 2 percent price increase in two years.

The deadline for achieving the target has been postponed six times. Currently, the deadline is set at “about fiscal 2019.”

Obviously, there is a limit to how much can be done to secure an end to deflation if the central bank’s monetary policy is solely relied on.

Kuroda’s five-year term as governor will expire in April. Regardless of whether he stays on, there is no doubt that the main theme to be addressed during the next governor’s tenure will be how to put the monetary situation back on the right track after ending the different-dimension relaxation.

It is hoped that the next Bank of Japan governor will maintain the bank’s readiness to sufficiently cooperate with the government and other major central banks overseas, and engage in policy management based on a broad view of things.

(From The Yomiuri Shimbun, Feb. 4, 2018)Speech



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