Bank of Japan (BOJ) Gov. Haruhiko Kuroda appears to be paying more consideration to the effects of Japan's ultralow interest rate policy on financial institutions, in what could be viewed as a step to avoid heighted public criticism of the repercussions of the bank's ongoing monetary easing policy 4 1/2 years after its implementation.
In an address in Tokyo on Dec. 7, Kuroda indicated the central bank would not merely devote itself exclusively to attaining a 2 percent inflation target, but would also take the operations of financial institutions into consideration.
"The stability of financial systems is an important policy issue for the BOJ alongside stability in prices. We will do whatever we can," Kuroda said.
Analysts started focusing on the "change" in the tone of statements issued by Kuroda on Nov. 13 with a lecture he gave in Zurich. In his lecture he referred to the concept of a "reversal rate," where the excessive lowering of interest rates by the central bank triggers capital constraint in the banking sector through a decline in net interest margins, discouraging financial institutions from extending loans and hurting the economy instead of aiding it. He said the central bank would "continue to pay attention to this risk as well."
When referring to the negative impact of low interest rates in a news conference in April 2016, Kuroda had stated that monetary policy was not for the sake of financial institutions. His words in Zurich therefore raised market speculation that the BOJ was strategically set to amend its ultralow interest rate policy.
Supporting this view is the recent marked decline in BOJ purchases of government bonds, which it began in April 2013. To increase the amount of money in the market and push up prices, the BOJ had ramped up its purchases of Japanese government bonds to a pace of about 80 trillion yen per year. But since the bank introduced policy in September last year that focused on keeping long-term interest yields to around zero percent, and switched its pivot from the money supply to the interest rate, the increase in its bond purchases has shrunk to a some 50-trillion-yen-per-year pace. This trimming of bonds purchases -- contrasting with the announced contractions by the central banks in Europe and the United States -- has been described by some as "stealth tapering."
Still, there are few in the market that believe the BOJ will immediately raise interest rates and search for an exit to its monetary easing. The recent inflation rate stands at 0.8 percent, far from its goal. The central bank expects achievement of the 2 percent target to come around fiscal 2019. In his remarks on Dec. 7, Kuroda said, "We will manage our policy with determination to achieve the 2 percent rate," stressing that there was no need for a change in policy.
Izuru Kato, chief economist at The Totan Research Co., commented, "Gov. Kuroda has a strong will to maintain the status quo, and his reversal rate reference probably had more significance in holding in check suggestions by some Policy Board members of additional easing. The earliest the bank would move to raise long-term interest rates would be around summer next year."