It can be said that the Bank of Japan's latest decision illustrated its stance of persistently striving for an exit from deflation while reining in the side effects caused by more than five years of monetary easing.
The Bank of Japan held a Monetary Policy Meeting in which it approved its modified monetary easing policy. While maintaining the framework of the current policy, which sets a target of keeping long-term interest rates at about zero percent, the central bank effectively allowed long-term interest rates to increase somewhat.
Concerning the purchase of Japanese government bonds, which has continued at an annual pace of about 80 trillion yen, the central bank said it will "conduct purchases in a more flexible manner." The decision was made in light of the fact that the central bank has held a massive volume of outstanding JGBs.
BOJ Gov. Haruhiko Kuroda explained the purpose of the latest decision in a press conference, saying that it is designed "to strengthen the sustainability of its monetary easing policy" and "improve the functions of the government bond market."
The BOJ also made a firm commitment to maintain an ultralow interest rate policy for an extended period of time. This is apparently intended to restrain an excessive market reaction and carry out monetary easing smoothly.
The rate of increase in the consumer price index currently stands at 0.8 percent, far short of the 2 percent target for escaping from deflation. Flexible purchases of JGBs are inevitable because it is necessary to continue the monetary easing policy.
The central bank has also launched a modification of its negative interest policy.
Annual interest of minus 0.1 percent is applied to about 10 trillion yen out of the all money deposited by private banking institutions in their current accounts at the BOJ. But the bank will reduce this 10 trillion yen portion to about 5 trillion yen.
Growth strategy key
Spurred by negative interest rates, the lending rates of financial institutions have been declining. This BOJ move indicates the central bank's consideration to the private banks, whose main business of lending has been deteriorating.
The central bank will also reexamine its method of purchasing exchange-traded funds (ETFs), which has been conducted at an annual pace of 6 trillion yen.
The purchase rate will be raised for ETFs linked to TOPIX (Tokyo Stock Price Index), which reflects all stock price movements of the market. This is aimed at avoiding a situation in which the BOJ's indirect holding rate of specific stocks will increase. This can be viewed as a realistic judgment.
At its latest meeting, the BOJ lowered its forecasts for increases in the consumer price index for fiscal 2018 through fiscal 2020. Even the growth forecast for fiscal 2020 would be held at 1.6 percent. Realization of the targeted 2 percent increase rate will most likely be postponed until fiscal 2021 and later.
As reasons for the protracted delay in price increases, the BOJ cited the deflationary mind-set, stagnant wage increases and bargain purchases via internet sales, among other factors.
The possibility that these factors will improve in a short period of time is low. It is imperative to ensure the effects of monetary easing permeate steadily through analysis.
Needless to say, there is a limit to what can be done by monetary policy alone. So the government's growth strategy will be important.
Corporate performance is robust now, providing a good chance to boost plant and equipment investment and actively carry out wage hikes. This must lead to a virtuous circle in which expansion of demand will push up prices.
(From The Yomiuri Shimbun,
Aug. 1, 2018)
Read more from The Japan News at https://japannews.yomiuri.co.jp/
