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News Navigator: What has BOJ Gov. Kuroda done to overcome deflation?

Bank of Japan Governor Haruhiko Kuroda (Mainichi)

The Mainichi answers some common questions readers may have about measures that the Bank of Japan (BOJ) has taken to overcome prolonged deflation under the leadership of Gov. Haruhiko Kuroda.

Question: Kuroda's term as governor is to end in about half a year. What has he achieved so far?

Answer: Kuroda was appointed as BOJ governor in March 2013. He implemented a quantitative easing policy -- in which the central bank buys massive amounts of government bonds from commercial banks and other institutions to increase the monetary base, the amount of money it supplies to markets -- with the goal of overcoming deflation, which is the main cause of Japan's sluggish economy. The scale of the quantitative easing was worth 60 trillion yen a year, the largest of its kind in the world.

Kuroda set a goal of raising the annual inflation rate to 2 percent in about two years and implemented surprising monetary policy measures. As a result, the value of the yen declined, share prices rose and corporate performances improved. Therefore, the quantitative easing policy on such an unprecedented scale was nicknamed the "Kuroda bazooka."

Q: So the BOJ's quantitative easing policy is a great success, is it?

A: Not necessarily. The policy produced only temporary effects. Consumer prices rose 1.5 percent up to April 2014. However, inflation slowed down because of a decline in consumer spending following a consumption tax increase from 5 percent to the current 8 percent in April that year and a sharp fall in crude oil prices. If people feel that consumer prices are unlikely to rise, companies refrain from increasing wages for their employees and making capital investments, and consumers decrease their consumption. To avoid such a situation, Gov. Kuroda increased the amount of government bonds the central bank purchased to 80 trillion yen in October 2014 to further expand the monetary base as part of an additional credit relaxation policy, which came as another surprise to market players.

Q: Was the additional policy effective?

A: Unfortunately, the additional policy did not lead to consumer prices rising as had been expected. The BOJ then decided in January 2016 to introduce a negative interest policy. Under the policy, the BOJ imposed negative interest rates on money that commercial banks deposit with the central bank. By requiring commercial banks to pay money to the BOJ when they deposit money with the central bank, the policy encouraged banks to use more money to extend loans.

However, the central bank came under fire for implementing the policy because it came all of a sudden and because a decline in market interest rates caused the profitability of commercial banks and insurance companies to decline.

Q: It was a serious problem, wasn't it?

A: To solve the problem, Gov. Kuroda implemented a so-called "yield curve control" policy of inducing the long-term interest rate (the market interest rate on 10-year government bonds) to around zero percent in September last year. The central bank thereby attempted to prevent interest rates from lowering excessively and shifted the emphasis in its policy from "quantity" to "interest rates" to enhance policy sustainability. This is because the amount of government bonds the central bank held became excessive and it has been pointed out that the quantitative easing policy had reached its limit.

Q: So the BOJ has taken various measures to overcome deflation. Will the central bank likely achieve its inflation target under the leadership of Gov. Kuroda?

A: More than four years have passed since Kuroda assumed the post of BOJ governor. However, the current inflation rate remains less than 0.5 percent. This past July, the BOJ has delayed its forecasted timing of achieving the inflation target from "sometime around fiscal 2018" to "sometime around fiscal 2019." This was the sixth time that the central bank had delayed the forecasted timing of achieving the target since Kuroda became central bank governor, and it has become almost impossible to achieve the target before his term ends in April 2018. There are fears that if the BOJ were to continue buying a massive amount of government bonds at high prices, the central bank could suffer a huge volume of losses from a possible decline in the prices of such securities. (Answers by Mikako Yokoyama, Tokyo Economic News Department)

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