When should ‘different-dimension’ monetary easing come to an end?

The Yomiuri Shimbun An end to deflation will likely come into view during the tenure of the Bank of Japan’s envisaged new leadership. How should the “different-dimension” monetary relaxation — a policy that is also producing adverse effects — be brought to a soft landing? In the management of its monetary policy, the central bank needs to take measures more appropriate for the circumstances.

Based on the government’s proposal regarding prospective Bank of Japan officials, the figures tipped for these posts expressed their opinions at the House of Representatives Committee on Rules and Administration. They were the incumbent governor, Haruhiko Kuroda, who has been nominated for reappointment; and Prof. Masazumi Wakatabe of Waseda University, a new prospective appointee, and Masayoshi Amamiya, an executive director at the central bank, both of whom have been tipped for the position of deputy governor.

Regarding when the 2 percent inflation rate target could be achieved, Kuroda clearly stated, “I’m convinced there is a high possibility of [the goal] being accomplished around fiscal 2019.”

He went on to say, “There is no doubt that an exit [from monetary easing] will be discussed around that time.”

It was the first time Kuroda had referred to the timing for a shift from the different-dimension monetary easing. His remark seems to have been intended to soften the impact of a policy change on the market, by expressing his view that the central bank will inevitably move toward scaling down the monetary relaxation during his second term.

Long-term interest rates rose sharply immediately after the remark, with the yen’s appreciation greatly advancing, too. The fluctuation in the market can be described as showing the difficulty of ending the large-scale monetary easing.

Although there has been an upward trend in the growth rate of consumer prices, the figure has stayed at 0.9 percent, compared with the 2 percent inflation target. “If necessary, I’ll propose additional relaxation,” Wakatabe said.

Policy flexibility needed

Wakatabe is known as a reflationist who attaches importance to monetary easing. He advanced his own theory again, paying no heed to the adverse effects of the relaxation policy.

As a result of the central bank’s massive purchase of government bonds through its quantitative easing policy, its ratio of holdings reached 40 percent of the total amount of outstanding government bonds. There is no denying this is undermining the liquidity of the government bond market.

There is a view that the Bank of Japan’s negative interest rate policy has caused a deterioration in the business performance of banks due to a reduction in their profit margin, producing the opposite effect of leaving them passive about lending money.

Wakatabe should be advised to adequately examine both the advantages and harmful influence of monetary easing, and also to act without being out of step with other members of the central bank’s top echelon.

In a joint statement issued in January 2013, the government and the Bank of Japan clearly stated the 2 percent inflation target. “I don’t think [the target] needs to be changed,” Prime Minister Shinzo Abe emphasized at the House of Councillors Budget Committee on Friday.

When the joint statement was put together, the Japanese economy was undergoing increasingly aggravated deflation. To boost the economy, the statement demonstrated a strong determination to end deflation through an inflation rate target comparable to those adopted by other advanced countries.

At present, the U.S. and European central banks, all of whom set targets equivalent to the Japanese level, have started to move toward reducing their monetary easing despite falling short of their goals.

It is necessary for the Bank of Japan to be flexible enough to re-examine its policy step by step, without being excessively bound by its 2 percent target.

(From The Yomiuri Shimbun, March 6, 2018)Speech


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