The Bank of Japan (BOJ) on April 27 abolished the 80-trillion-yen yearly cap on its government bond purchases at a monetary policy meeting in a bid to cushion the economic impact of the novel coronavirus pandemic, opening the way for an unlimited state bond buying spree by the central bank.
Even given that this is a time of emergency, a policy arrangement where the central bank can be allowed to take on the whole national debt inevitably entails risks.
The government adopted a 117-trillion-yen emergency economic stimulus package in response to the spread of coronavirus infections in Japan, for which an additional 20-trillion-yen-plus national bonds are expected to be issued as part of its resources. The latest BOJ decision is said to be aimed at curbing a possible rise in long-term interest rates.
Bent on bailing Japan out of prolonged deflation, the BOJ introduced a powerful monetary easing policy in the spring of 2013. It has since repeatedly eased credit and raised the annual ceiling of the BOJ's state bond purchases to 80 trillion yen.
However, the actual amount of the central bank's state bond buying hovered around a little over 10 trillion yen annually. Even if the BOJ had upheld the previous 80-trillion-yen cap, it may well have had enough leeway to respond to the government's coronavirus countermeasures.
And yet, BOJ Gov. Haruhiko Kuroda stated that the removal of the annual ceiling was "aimed at powerfully propping up the economy by clarifying the BOJ's stance to buy as much government bonds as needed."
Certainly, the government is required to provide further support as economic activities are stalled amid the spread of the coronavirus. In the United States, the Federal Reserve Board (FRB) adopted an emergency step in March to allow it to purchase unlimited amounts of U.S. government bonds to help finance the Donald Trump administration's $2-trillion-plus economic relief package.
However, the FRB's situation is different from that faced by the BOJ, which already holds some 40% of outstanding Japanese government bonds. Up until now, the Japanese central bank has heavily supported the government's financing as Japan's fiscal health remains the worst among advanced economies.
Fundamentally, debt monetization -- where the central bank takes on unlimited amounts of government securities to finance state deficits -- is prohibited. This is because such a measure could discredit the currency and trigger hyperinflation and other adverse effects.
The BOJ has insisted that the removal of its government bond purchase ceiling does not constitute debt monetization, on the grounds that it is not directly underwriting government debts. However, if the government overly relies on the BOJ in steering state finances, it can get infinitely closer to debt monetization. The government is urged to scrutinize any additional measures that can truly bring benefits to the public.
The BOJ's goal of halting Japan's chronic deflation, which it has claimed as the very basis for its ultra-easy monetary policy, is also wavering. The central bank speculates that its years-long 2% inflation target would not be achieved by fiscal 2022, meaning that it would be difficult to attain that goal while Gov. Kuroda is in office.
Although the BOJ blames the ongoing coronavirus pandemic for the failure, it is problematic that it has yet to accomplish its 2% inflation target despite its longtime ultra-loose monetary policy. After the coronavirus crisis is over, the central bank will need to review the framework of its own credit policy.