The Bank of Japan (BOJ) has altered its monetary policy for the first time in a long time. It retained its benchmark “short-term interest rate at minus 0.1% and long-term interest rate near zero,” but it took the step of making several revisions, including allowing the long-term rate to fluctuate in a wider range.
This reportedly is an adjustment to prepare for the further prolongation of the BOJ’s unprecedented monetary easing policy.
The bad effects of the vigorous monetary easing are growing more severe. Japanese government bond and stock markets are becoming distorted, and banks are being dealt a blow to their management. Some will likely approve of this move to deal with these kinds of side effects.
What should be asked here, though, is why this unprecedented monetary easing policy has to be prolonged further even to the degree that measures to address the side effects are necessary.
In the latest monetary policy meeting, the BOJ again cut its inflation forecast. The 2% inflation target was initially to be achieved within about two years after its introduction. But five years have already passed since then.
The BOJ forecast inflation even for fiscal 2020 at 1.6%, down 0.2 points from the forecast in April. This suggests that it acknowledges the difficulty of achieving a 2% target.
The downgrading of inflation forecasts is usually accompanied by additional monetary easing, such as the lowering of policy rates. But contrary to this, the BOJ made revisions to allow interest rates to move upward.
Furthermore, on exchange-traded funds (ETF), which the BOJ purchases in large quantity, the central bank used the expression “changes in the amount of purchases” and found a way to cut rather than increase ETF purchases.
The response seems to be incoherent. But it can be said the BOJ forced itself into a corner and could not do otherwise.
The failure of the measures is evident. But BOJ Governor Haruhiko Kuroda continues to obstinately insist, “I don’t think I was wrong at all.” He only repeats that the momentum of price hikes is continuing and the inflation rate will eventually reach 2% if we allow sufficient time.
If he admits failure and substantially changes his policy, the yen’s appreciation and higher interest rates could accelerate in reaction. Kuroda perhaps had to avoid a situation that shakes the foundation of Abenomics.
Be that as it may, the harmful effects caused by the protracted poisonous policy can’t be eliminated by makeshift corrections. But once a correction is made, the market naturally demands the next one.
There is no guarantee that matters will go as the BOJ desires. But one thing is clear: If the BOJ falls into a serious situation, the Japanese economy and the people’s livelihoods will be seriously affected.