Reappointed BOJ Gov. Kuroda must seek soft landing from easing policy

The Yomiuri Shimbun The so-called monetary easing of a different dimension has begun to produce side effects. How can the Bank of Japan guide long years of quantitative easing and other monetary policies to a soft landing while maintaining business expansion? Haruhiko Kuroda will have to tackle this greater challenge in his second term as the central bank governor.

The reappointed Kuroda has formed the Bank of Japan’s new top management lineup with two new vice governors, Masayoshi Amamiya and Masuzumi Wakatabe.

After being appointed to his first term in March 2013, Kuroda set a goal of getting Japan out of deflation in two years and put forth an audacious monetary easing policy dubbed the “Kuroda bazooka.” He has pushed ahead with quantitative easing on a greater scale than anticipated by the market.

Easy money brought about a weaker yen and high stock prices, thereby boosting corporate performance. As expectations rose toward the Bank of Japan, a sense of disappointment also began to prevail in the market when it postponed additional monetary easing.

The central bank shifted the axis of its monetary easing from “quantity” to “interest rates” in the autumn of 2016, thus switching to a method of attaching importance to interactions with the market.

From now on, its task is to rectify the negative interest rate policy, among other things. Kuroda must further refine his assessment of economic conditions and market trends.

The goal of raising the inflation rate to 2 percent, set by the Bank of Japan, has yet to be realized.

Speaking at a news conference to mark his reappointment, Kuroda said, “There’s still some distance to achieving the inflation target.” He thereby emphasized his idea of maintaining a loose monetary policy.

Don’t cling to inflation goal

Kuroda adheres to the principle of attaining the target probably because he is wary of the possibility of an acute interest rate hike if speculation of a policy shift prevails in the market.

As things stand now, the course of action directed by his policy is understandable.

A matter for concern is the adverse effects of the massive easing policy being carried out over a long time.

Banks’ earnings have been squeezed, as interest rates on their loans were held at low levels. It has been pointed out that the favorable effect of monetary easing has rather decreased, as their new loans became stagnant.

There is a view in the stock market that the Bank of Japan’s purchase of exchange-traded funds (ETFs) has distorted stock prices. The central bank’s holdings of Japanese government bonds have reached 40 percent of outstanding bond issues, causing the bond market to become rigid.

It is necessary for the Bank of Japan to flexibly reexamine its policy from a midterm viewpoint, and not just adhere to the 2 percent inflation target.

Policies adopted by U.S. and European monetary authorities that have launched an exit strategy even though prices have not reached targeted levels can be used as reference.

A look at the world economy shows that U.S.-China trade friction has been emerging as a new risk factor.

Some in the market believe that interest rates should be raised early, so there will be room to implement a monetary easing policy if businesses lose steam.

The Bank of Japan needs to consider the timing for normalization of its monetary policy amid the protracted business expansion, even if it is too early to do so now.

(From The Yomiuri Shimbun, April 11, 2018)Speech


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