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BOJ's tweaking of lax monetary policy a superficial bandage to a deeper problem

Bank of Japan Gov. Haruhiko Kuroda speaks at a news conference following a BOJ Policy Board Meeting on Monetary Policy at the BOJ head office in Tokyo's Chuo Ward on July 31, 2018. (Mainichi)

TOKYO -- The Bank of Japan (BOJ) made minor adjustments to its ultra-lax monetary policy for the first time in about 22 months, acknowledging that at the current rate, the government's target of 2 percent inflation would likely be impossible to accomplish.

However, there are numerous contradictions within the stopgap measure, making the latest move a last-ditch effort by the BOJ, which has repeatedly postponed its deadline for achieving its inflation goals. There are no prospects for whether the latest move will lead to confidence in the BOJ's monetary easing policy or to its continuity.

At a press conference held after a BOJ Monetary Policy Board Meeting on July 31, BOJ Gov. Haruhiko Kuroda announced his intention to expand the range of fluctuations in interest rates, while maintaining a policy of ultra-low interest rates.

"Accomplishing a price upswing is taking longer than we initially anticipated, so we're taking some measures," he said. "But sweeping monetary relaxation can be sufficiently maintained."

In order to climb out of the long-term deflation that Japan has found itself in, the BOJ, along with the government, has promoted large-scale monetary easing in order to achieve an inflation rate of 2 percent. However, concerns about the future have put a damper on domestic consumption, and prices have failed to rise. The BOJ has postponed its date for accomplishing the 2 percent goal six times, and has been pressured to review its policies.

In February 2016, the BOJ introduced negative interest rates for a portion of money that banks deposit to the BOJ, meaning the central bank charges fees for other banks to deposit their money there -- with the hope that this would encourage banks to use their money instead of saving it. In September of that year, the BOJ shifted the focus of its monetary policy from the amount of government bonds it purchased to the interest at which they were purchased, and decided to set long-term interest at around zero percent.

And yet, prices failed to rise, and negative interest rates hurt banks' earnings. Because the BOJ took the extreme measure of suppressing fluctuations in long-term interest, transactions in the government bond market plummeted, and recently, there even were days that saw no successful transactions.

As the negative side-effects of monetary easing continue to balloon, the prospects of the BOJ meeting its most prized goal of reaching its inflation target are unclear. Moreover, at the latest Monetary Policy Board Meeting, a downward adjustment was made for the commodity price forecast by fiscal 2020, making the path to an inflation rate of 2 percent uncertain. The latest tweaks to policy are an act of desperation on the part of the BOJ.

Kuroda announced that as a countermeasure against the "side-effects," the BOJ would be expanding the range of fluctuation of long-term interest rates by about twice what it is now, to around positive and negative 0.2 percent. "This is necessary to improve the function of the government bond market," Kuroda said. "By allowing for fluctuations, we can revitalize the market."

This is effectively a green light to raising long-term interest rates, but this runs the risk of triggering an appreciating yen and a drop in stock prices if the market interprets Kuroda's announcement as the scaling back of monetary easing.

If market destabilization exerts downward pressure on the economy, achieving target commodity prices will become an even greater challenge. Having an announcement to expand the fluctuation range of interest inadvertently become a message that the BOJ is backing down on monetary easing was the one thing that the BOJ wanted very much to avoid.

This is why it announced that it would continue with its monetary easing policy. The BOJ has adopted forward guidance, which projects that for the time being, it will maintain extremely low levels of interest. Its aim is to indicate the BOJ's strong will to take measures against the negative side-effects of long-term monetary easing, while achieving its target of 2 percent inflation.

Kuroda appeared self-assured when he said, "We implemented forward guidance in order to secure the market's confidence in continuing a policy of significant monetary easing for a long period of time. I can reject projections that interest rates will be raised."

However, Kuroda did not specify a time frame for how long the monetary easing policy will be continued, and some who attended the Monetary Policy Board Meeting opposed Kuroda's proposal, arguing that the relationship between long-term monetary easing and target prices should be made more explicit. In addition, because the BOJ has long promised to continue quantitative easing until the inflation rate stabilizes at over 2 percent, the latest move seems like mere minor adjustments to existing policy.

Yasunari Ueno, chief market economist at Mizuho Securities, criticized the BOJ's latest measures. "The BOJ initially took monetary easing measures as a short-term solution, but as the process has been drawn out, the measures have generated strains and doubts," he said. "The minor changes in policy are a move made out of desperation."

(Japanese original by Takayuki Sakai and Kei Tsuchiya, Business News Department)

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