The rare reappointment of a Bank of Japan governor appears to be a clear message from the government that it will remain committed to ending deflation by continuing with so-called "different-dimension" monetary easing.
How far can the current policy be carried through while the U.S. and European central banks are moving toward winding down their easing measures? A more flexible policy stance will be essential during the Bank of Japan chief's new term.
The government has presented to executive boards of the Rules and Administration committees of both Diet chambers its proposal to reappoint Haruhiko Kuroda, whose current term ends on April 8, as the central bank chief.
Bank of Japan Executive Director Masayoshi Amamiya and Waseda University Prof. Masazumi Wakatabe are set to replace the incumbent deputy governors. The nominees are to assume their posts after gaining approval from both chambers of the Diet.
Kuroda is set to serve another five-year term until April 2023.
The 10 predecessors before him were successively replaced after one term. There is no doubt that holding on to the top post for the long term -- the first time in a half-century -- is attributable to Kuroda's ability to support the Abenomics economic policy package through bold monetary easing dubbed the "Kuroda bazooka."
Additionally, the government appears to have been aware of the potential negative effects which could cause financial market turmoil if it replaced Kuroda, which would be viewed as a change in the government's policy.
It is concerning that signs of stagnation have emerged with the massive monetary easing.
The rate of increase in consumer prices currently stands at 0.9 percent. This remains distant from the 2 percent target.
Don't fuel speculation
Sluggish growth in consumer prices is at present a common phenomenon among advanced countries. Structural factors such as an increase in exports from emerging countries, where production costs are low, are behind this. Raising prices by relying heavily on monetary measures is no easy task.
The Bank of Japan's holding of government bonds purchased through quantitative easing accounts for 40 percent of the total amount of outstanding government bonds. This has the aspect of hampering the formation of a sound bond market.
Some observers have pointed out that the central bank's ultralow interest rate policy -- which stepped into negative interest rates -- has led to a decline in the profitability of banks and made them cautious about extending loans, paradoxically.
Concerns that the side effects of monetary easing will increase further cannot be wiped out. The central bank is required to keep an attentive eye on its policymaking.
Deputy governor nominee Wakatabe is seen as a "reflationist" who emphasizes monetary easing. Six Policy Board members, who have voting rights for policy decisions along with the governor and the deputies, are positive across the board about monetary easing.
It is hoped that they will discuss a wide range of options without sticking to the easing policy line.
How to deal with a joint statement by the government and the Bank of Japan that the bank aims to achieve the 2 percent inflation target "at the earliest possible time" needs to be addressed.
At the same time, a scaling down of monetary easing could cause turmoil in the markets by way of a sharp rise in long-term interest rates and a plummet in stock prices.
The recent decline in global stock prices was triggered by market speculation that the U.S. Federal Reserve Board would raise interest rates earlier than expected. The Bank of Japan must take this as a valuable lesson.
(From The Yomiuri Shimbun, Feb. 17, 2018)
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