No prospects seen for BOJ to end ultra-easy money policy

Four years have passed since the Bank of Japan (BOJ) began its ultra-easy monetary policy under the leadership of Gov. Haruhiko Kuroda.

The central bank implemented the unprecedented monetary policy on April 4, 2013, saying that Japan could achieve an annual inflation rate of 2 percent within about two years. However, no prospects can be seen that the goal can be achieved in the foreseeable future.

The task will likely be handed over to the next BOJ governor who will assume the position in April 2018.

"We'd like those who can talk about a strategy of finding a way out (of the ultra-easy money policy) to serve as members of the Policy Board," a high-ranking official of the BOJ told a source close to the government. The official was talking about the replacement of two of the six members of the board whose current terms are due to end in July.

The official kept in mind that the central bank needs to find a way out of the ultra-easy money policy. The selection of two new members of the Policy Board is viewed as a prelude to the selection of the next BOJ governor.

The source said, "The BOJ is deeply concerned about a way out even though officials never mention that publicly."

Under the ultra-easy money policy, the BOJ has purchased a huge amount of government bonds from financial institutions and in turn supplied a massive amount of money to financial markets in a bid to overcome the prolonged deflation.

The policy was designed to push down interest rates, and thereby encourage businesses and households to invest and spend more money as well as to drive down the value of the yen and prop up share prices to help improve companies' business performances.

The inflation rate rose to around 1.5 percent about a year later, but subsequently slowed down.

The BOJ further relaxed its monetary grip in October 2014, and went on to introduce negative interest rates in January 2016. However, the inflation rate did not rise as the BOJ had expected, forcing the central bank to transform its monetary policy into one centering on manipulating long- and short-term interest rates in September.

In November, the BOJ delayed the target year for achieving the 2 percent inflation target by a year to sometime around fiscal 2018. Gov. Kuroda has thus abandoned achieving the goal during his tenure.

Risks involving the ultra-easy monetary policy have grown over the past four years. The outstanding amount of government bonds that the BOJ holds has steadily increased, surpassing 400 trillion yen for the first time in October 2016.

If the BOJ is to decrease the volume of government bonds it will purchase in the future as part of tightening its monetary grip, it would cause the market prices of government bonds to plummet and interest rates to spike. It could then cause a massive amount of latent losses involving government bonds that the central bank holds.

Such losses would decrease the amount of money the BOJ pays to state coffers, which would in turn increase the burden on taxpayers.

A senior BOJ official admits that the central bank is considering a way out of its ultra-easy money policy, but Gov. Kuroda told the Diet on April 4, "It's still premature to consider the matter."

Sayuri Kawamura, senior researcher at The Japan Research Institute Ltd. pointed out that the BOJ has failed to provide a full explanation on an exit from its ultra-easy money policy.

"The U.S. Federal Reserve Board has fully explained a way out of its easy money policy, including negative aspects such as predicted losses, in sharp contrast to the BOJ," she said.