September 22, 2016 (Mainichi Japan)
Editorial: BOJ' new policy phase highlights failure of monetary easing experiment
The Bank of Japan (BOJ) comprehensively reviewed its large-scale monetary easing policy, which it carried out under the leadership of Gov. Haruhiko Kuroda, and announced a new framework for its bond-buying program to keep the yield of the bellwether 10-year Japanese government debt at around zero percent.
Roughly 3 1/2 years have passed since the BOJ began quantitative and qualitative easing of its monetary grip as the "first arrow" of the Abenomics economic policy mix promoted by the government of Prime Minister Shinzo Abe. However, the fact that the BOJ has been forced to review the policy and change its framework clearly demonstrates that the policy has reached a deadlock.
At a news conference, the BOJ would not admit that its policy has failed. Gov. Kuroda categorically denied that the central bank had been forced to change the policy framework due to limits of its monetary policy.
The BOJ even praised the achievements it has made through its monetary easing policy saying, "Over that period (when the policy was implemented), the situation surrounding Japan's economy and consumer prices greatly improved, and Japan has overcome deflation in that consumer prices no longer keep declining."
The central bank claimed that Japan's failure to achieve its target of an annual inflation rate of 2 percent over the space of about two years is attributable to a sharp drop in crude oil prices, a consumption tax increase from 5 percent to 8 percent in April 2014, the slowdown of emerging countries' economies, and Japanese people's unique views on consumer prices. The BOJ thus denied that the failure was a result of problems involving the central bank's ultra-easy money policy.
When the BOJ announced at a news conference on April 4, 2013 that it would launch an ultra-easy money policy, Gov. Kuroda showed off panels bearing "2 percent," and "2 years," and appeared confident of the credit easing policy it had just approved. 時計の針を２０１３年４月４日に戻してみよう。
Kuroda emphasized that the central bank's new policy was different from its past policies on three points. Firstly, the BOJ stated a target year for achieving 2 percent inflation. Secondly, the central bank not only verbally promised to achieve the goal but also took unprecedented action to purchase a massive amount of government bonds in an attempt to convince the public that consumer prices would rise. Thirdly, the BOJ pledged to avoid implementing small-scale additional measures bit by bit.
The central bank governor declared at the time, "We've adopted all measures that are necessary now to achieve the goal of a 2 percent annual inflation within two years."
Deputy Gov. Kikuo Iwata, who joined the central bank simultaneously with Kuroda, even stated that he would step down if the central bank failed to achieve the inflation target within two years. He later retracted his statement saying, "I meant that I must place priority on fulfilling my accountability."
The BOJ had initially stated that the 2 percent target could be achieved if the central bank drastically increased the volume of money it supplied to the market. Yet the target has not been reached.
The BOJ postponed the target date for achieving an inflation rate of 2 percent whenever it announced its outlook for consumer prices in each quarter. In October 2014, the central bank drastically increased the amount of money it supplied, but remained far from being able to achieve the inflation target.
In reviewing its policy, the BOJ cited the effects of the consumption tax increase in 2014 and the slowdown of other countries' economies as the reasons why the target had not been achieved. But BOJ executives are experts in monetary policy. They cannot make excuses by saying these factors were beyond the scope of their assumptions.
True, crude oil prices plummeted more sharply than had been widely predicted. In reviewing its policy, the BOJ said that Japanese people's predictions of future consumer prices are largely affected by the actual fluctuation in consumer prices that is going on. The central bank pointed out that prolonged deflation as well as labor-management negotiations on pay raises during the so-called spring labor offensive, which are unique to Japan, have made the Japanese economy more susceptible to short-term consumer price declines. However, these are nothing but excuses and attempts to shift the blame.
The BOJ's new framework and its dumping of the two-year deadline for achieving its target represents a great transformation in its policies, from one placing emphasis on the amount of money supplied to the market to one that places more importance on interest rates.
The BOJ has also been forced to modify its negative interest policy, which it introduced in February this year, because critics have pointed out numerous problems, such as a decrease in financial institutions' profits, and difficulties that public pension funds and others face in investing money over the long term to gain stable yields.
Under the previous framework, market players expected the BOJ to further relax its monetary grip whenever it became certain the central bank would postpone the target year for achieving a 2 percent inflation rate. The central bank's monetary policy thus became a major matter of concern for market players. The framework change will likely rectify the situation.
Still, questions remain as to whether the BOJ can control not only short-term interest rates but also long-term interest rates governing yields on 10-year government bonds to attain levels which the central bank regards as desirable. Long-term interest rates should be determined by the market. The rates can sound an alarm over the government's irresponsible use of taxpayers' money. Monetary policy that restricts such a function of long-term interest rates deserves criticism as excessive market intervention by the central bank.
Needless to say, what now must be brought up is the question of responsibility for failure of the experiment, which the BOJ began on its promise to achieve a 2 percent inflation rate within about two years.
The BOJ has amassed over 450 trillion yen worth of assets. This includes government bonds whose prices could plummet in the future and investment trust funds. And the amount is expected to increase. It is a matter that could affect the credibility of the yen.
How to normalize the bond market, which has been distorted because it has relied on the BOJ's massive purchase of government bonds, will pose a serious challenge. If the annual inflation rate is stabilized at over 2 percent, the BOJ will need to decrease the amount of government bonds it buys on a step-by-step basis.
However, if the BOJ hints at its intention to withdraw from the bond market as a major buyer, it could cause market prices of government bonds to sharply decrease and long-term interest rates to spike.
To prevent such a situation, the central bank would have to keep buying government bonds, even though this could generate an economic bubble or cause the economy to overheat.
As such, the central bank will face difficulty in seeking a way out of the policy of buying a massive volume of government bonds.
The BOJ is not solely to blame for the ultra-easy money policy that has left serious problems for Japan's future.
The responsibility of the government, which relied on the "first arrow" of Abenomics, should also be called into question.