The Bank of Japan (BOJ) is expected to acknowledge the positive effects of its ultra-easy monetary policy, including massive government bond purchases and the introduction of negative interest rates, at its policy board meeting scheduled for Sept. 20 and 21, while maintaining a goal of a 2 percent rise in the consumer price index (CPI) and proposing ways to seek further easing.
In the nearly 3 1/2 years since the BOJ launched its quantitative and qualitative monetary easing in April 2013, the central bank beefed up its ultra-easy economy policy, such as increasing the amount of government bond purchases from 50 trillion yen a year to 80 trillion yen and introducing negative interest rates. However, the July national CPI (excluding fresh produce) dropped 0.5 percent from the same month in 2015 -- far below its target of a 2 percent increase. In response to the disappointing figure, the BOJ has decided to have a comprehensive review of its monetary policies at the board meeting.
The key points in the review are examining factors preventing the 2 percent inflation target and positive and unfavorable effects of the negative interest rate policy.
The BOJ board members joining the Sept. 20-21 meeting are expected to agree on an understanding that it is taking more time than initially expected to meet the 2 percent target due to the sharp drop in oil prices, among other factors, though buying up the massive amount of government bonds was effective in holding down interest rates and therefore boosting anticipation for price increases in the future.
Nevertheless, the BOJ is poised to maintain the 2 percent inflation goal. Since its initial plan to reach that target in about two years has already failed, the central bank will place emphasis on its firm stance to achieve the target inflation rate at an early stage.
In regard to the negative interest rate policy introduced in February this year, it proved effective in drastically lowering mortgage rates, but the central bank has met a backlash of criticism from financial institutions claiming that the policy was hurting their businesses. Banks and other financial firms are facing difficulties making profits since they cannot lower interest rates on customers' savings to negative while interest rates on loans are dipping. BOJ Gov. Haruhiko Kuroda admitted on Sept. 5 that caution should be taken over the unfavorable side effects of negative interest rates, such as lower earnings for financial institutions and poor investment performances for insurance and pension funds.
At the same time, Kuroda said he was now convinced that the combination of government bond purchases and negative interest rates has proved to be fairly powerful. BOJ board members are expected to reach a consensus that further negative interest rate measures are possible in the comprehensive review, and the central bank is set to display its attitude that there is a possibility of considering lowering the current minus 0.1 percent interest rate even further if necessary.
Meanwhile, a review of the purchasing system for government bonds has been suggested to mitigate the side effects of the ultra-easy monetary policy. Currently, the BOJ buys government bonds in ways that will result in an average maturity term of seven to 12 years, but a plan that will be discussed at the meeting aims to reduce the amount of long-term bonds and instead increase the amount of short-term bonds purchases. In the meantime, the central bank plans to maintain the amount of bond purchases.
Some board members have expressed unfavorable opinions over reducing the amount of long-term bond purchases, but as the long-term interest rate hike could be seen as a negative factor for economic activities, they might not reach a consensus over the matter at the upcoming meeting.