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BOJ left alone in keeping to script of monetary easing

BOJ Governor Haruhiko Kuroda (Mainichi)

Bank of Japan (BOJ) Gov. Haruhiko Kuroda on Sept. 21 justified the central bank's delay in exiting from its current line of quantitative easing as it continues to eye a 2 percent inflation target.

"Monetary policy is determined by each country's economic price trends. The rate of price escalation in Japan has been far from our target, and there's nothing strange at all about our monetary policy being different from that of the United States and Europe," Kuroda said in a news conference on Sept. 21 following the central bank's two-day policy meeting.

Just like the United States and European countries, the BOJ implemented monetary easing in the wake of the global financial crisis stemming from the collapse of financial services firm Lehman Brothers in 2008. The central bank has expanded this easing since Kuroda assumed his position in March 2013, and the governor's policies have been referred to as the "Kuroda bazooka." Monetary easing has been a pillar of Prime Minister Shinzo Abe's economic policy mix, dubbed "Abenomics." With additional monetary easing and the introduction of negative interest rates, the BOJ has maintained a policy under which long-term interest rates have been held down to roughly zero percent. As a result of maintaining a quantitative easing policy, the BOJ's total assets have swelled to about 500 trillion yen -- roughly the same level as those of the Federal Reserve Bank of the United States, whose economy is roughly three times larger than that of Japan -- and the figure is continuing to grow.

Forming a background to the situation is the weakness of price increases in Japan. As a result of a recovery in the world economy, the rate of increase of consumer prices has topped 1.5 percent in the United States and the eurozone, approaching a target of 2 percent. Yet in Japan, the rate has languished in the middle of the zero to 1 percent range.

Influencing this situation are the facts that in Japan, income growth on the whole has been sluggish and there has thus been a strong tendency for consumers to remain budget-minded, while companies have been cautious about raising commodity prices.

"The deflationary mindset stemming from deflation that continued for 15 years is still firmly entrenched within companies and households," Kuroda said. To change that mindset he has decided to continue a policy of powerful easing until Japan has achieved its 2 percent inflation target with stability.

In July, two members of the BOJ's Policy Board who had dissented from the central bank's policy of monetary easing stepped down. In the policy meeting on Sept. 21, newly appointed board member Goshi Kataoka voted against maintaining the current stimulus measures, saying that current monetary easing was insufficient as a means for Japan to achieve the 2 percent inflation target. Talk of finding an exit thus appears far off.

However, concerns have emerged about Japan continuing on a path of large-scale easing alone. There is a risk of a unilateral weakening of the yen and strengthening of the dollar as a result of money flowing from Japan to the United States and Europe in hope of high yields. This could invite criticism from overseas that Japan is using monetary policy to weaken the yen.

Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co., additionally commented, "In the long term, there may emerge a problem of money absconding overseas on the premise that investing in Japan will not bring a profit."

If central banks in the United States and Europe were to switch to monetary easing policies due to another economic downturn in several years and if Japan had no leeway for additional easing, then there is a risk that the yen could climb with the interest rate differential shrinking.

An official at one major securities company commented, "Japan should also flexibly make fine adjustments without adhering to a 2 percent target."

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