The Bank of Japan will publish its findings next month on the pros and cons of various unconventional monetary easing tools used in the 25-year fight against deflation, in another symbolic step toward ending its massive stimulus.
While the BOJ said the outcome of the review will not have direct implications on monetary policy in the short term, it will likely include findings and surveys that justify its plan to proceed steadily with policy normalization.
The BOJ will release results after its last policy meeting this year on Dec. 18-19, when some analysts expect it to raise interest rates from the current 0.25%.
The review will be the BOJ’s first attempt to take an in-depth, analytical look at the downsides of prolonged monetary easing.
In particular, it will likely explain how central banks have limited power to change public perceptions about future price swings, as seen in the mixed results of former governor Haruhiko Kuroda’s radical stimulus, which sought to shake Japan from a deflationary mentality.
The findings from Governor Kazuo Ueda’s flagship project, which began when he took office in April last year, may offer insight into what tools the BOJ would use – and prefer not to use – to deal with the next economic downturn.
It could also include suggestions about risks the BOJ might focus on as it continues to scale back asset purchases and raise interest rates from levels still near zero.
“We hope to provide useful material for thinking about desirable monetary policy in the long run,” BOJ Governor Kazuo Ueda said in a press conference on October 31.
The review could become a useful guide for other central banks as an encyclopedia of unconventional easing tools and their effectiveness.
Japan’s 25-year experience of deflation and economic stagnation has forced the BOJ to become a pioneer of unconventional policies, such as zero interest rates and quantitative easing.
Other global central banks then resorted to similar radical measures during major crises such as the global financial crisis and the COVID pandemic, but were largely able to exit them quite quickly as their economies began to recover.
As a member of the Board of Directors, Ueda played a key role in the BOJ’s 1999 introduction of forward guidance, a promise to keep rates low for an extended period in the hope of stimulating demand.
The most controversial policy came in 2013 when, under Kuroda’s leadership, the BOJ launched a huge asset purchase plan that later combined negative interest rates and control of bond yields.
As inflation continued to fall short of the 2% target, the BOJ conducted several reviews on the side effects of prolonged easing, especially to extend the duration of the stimulus.
This time, the review will take a backwards approach to what didn’t quite work. In particular, it will explain how Kuroda’s stimulus boosted growth and created jobs, but only raised inflation by 0.7 percentage points – not enough to reach the BOJ’s target.
It will also highlight key flaws, as the BOJ’s massive asset buying and cap on bond yields have dried up market liquidity, distorted asset prices, eroded bank profitability, and forced financial institutions to increase high-risk lending. risk, such as those in the real estate sector.
Those findings will be based on nearly three dozen pieces of academic research conducted by his staff, much of which has already been published by the BOJ.
WHAT WILL HAPPEN?
Another outcome would be findings and surveys showing that Japan is experiencing structural changes that allow the BOJ to raise borrowing costs.
Among them will be a survey conducted by BOJ branches, which showed that more companies now view rising prices and wages in a more positive light than in the past.
Other research that will be included in the review will explain how an increasingly tight labor market and rising material costs are leading companies away from their long-held aversion to price increases.
In a speech in May, Vice Governor Shinichi Uchida said Japan is on the verge of eradicating a “deflationary norm,” or the perception among households and businesses that prices and wages will not rise much – remarks that preface the salient point of the review.
The BOJ, however, will not delve into thorny topics such as the cost of its huge holdings in exchange-traded funds (ETFs), which could hurt its balance sheet if stock prices collapse.
It is also unlikely to offer a precise estimate of Japan’s neutral interest rate, which is the rate at which monetary policy is neither contractionary nor expansionary.
The BOJ did not release its estimate of the neutral rate, which is key to assessing how far it can raise borrowing costs. Analysts place it at around 1%, well above the BOJ’s current policy rate of 0.25%.
Overall, the review will aim to take a neutral and scientific view on the controversy over the BOJ’s radical stimulus, which has led to a deep and sometimes emotional rift between its supporters and its critics.
“There will be no direct answers to many of the questions covered by the review. But the goal was to discuss past phases of monetary easing and highlight some positive changes that are occurring in the economy,” said Mari Iwashita, chief economist market analyst at Daiwa Securities and veteran BOJ watcher.
“It’s a good way forward and comes at a good time, when Japan is finally seeing the first signs of sustained inflation.”
How might the findings from the BOJ’s review highlight the risks of reducing asset purchases and raising interest rates in the current economic climate?
1. What are the potential outcomes of the Bank of Japan’s review on unconventional monetary easing tools used in the fight against deflation, in terms of policy decisions and implications on future economic stability?
2. Can the findings from this review offer insights into the potential challenges and risks associated with continuing to scale back asset purchases and raising interest rates from current levels?
3. How did the experiences of other central banks, particularly during the global financial crisis and the COVID pandemic, influence the BOJ’s approach to unconventional monetary policies?
4. What are some of the key successes and shortcomings of former governor Haruhiko Kuroda’s radical stimulus measures, and how did they impact Japan’s economy and financial institutions?
5. What are some of the ways that the BOJ’s unconventional policies have affected market liquidity and asset prices, and what are the long-term implications of these effects?
6. How has the BOJ’s approach to forward guidance, negative interest rates, and control of bond yields contributed to Japan’s economic growth and inflation targets?
7. What role have structural changes within the Japanese economy played in the BOJ’s decision to normalize monetary policy, and how might these changes inform future decisions?
8. Is there a possibility that the BOJ will release an estimate of its neutral interest rate, and if so, what does this mean for future policy decisions?
9. How has the BOJ balanced the need for monetary stimulus with potential negative side effects on its balance sheet, and what strategies have been effective in managing these risks?
10. Can the results of this review be extrapolated to other central banks facing similar challenges, or are they unique to Japan’s experience with deflation and economic stagnation?
