The Bank of Japan is changing tack as it tries to get the economy growing again.
If monetary policy has effectively reached its limits, which appears to be the case, greater emphasis will now have to be placed on fiscal policy and structural reform to raise inflation and trend growth
For the last three years it has been printing massive amounts of money – quantitative easing – to buy bonds hoping that that cash would make its way into the real economy and be used by companies for investment and by ordinary people to buy things.
Now as well as that, the bank will focus on the amount of interest (yields) paid to investors who buy government bonds.
At a news conference, BoJ Governor Haruhiko Kuroda said the idea is to have a more flexible framework than before to be able to better respond to financial conditions.
“In order to achieve the 2 percent inflation rate as soon as possible, we have decided to implement a new framework for the current quantitative and qualitative easing (QQE). The new framework, which centers around a yield curve control, will be more flexible to prices and financial conditions compared to the original methods of controlling the growth of monetary base and outstanding government bonds,” Kuroda said.
The bank wants to keep the interest paid on government bonds at zero rather than in negative territory.
The bank’s stimulus programme has been running for over three years but has failed to stimulate the world’s third-largest economy, which has been stagnant for decades.
It included slashing interest rates – its benchmark is at a 0.1 percent negative rate.
Deflation remains entrenched with people putting off buying things because they are sure prices are going to fall further.
Indeed core consumer prices continue to weaken. In July the price index was down 0.5 percent from a year ago.
That makes the Bank of Japan’s target of raising inflation to 2 percent seem very difficult to achieve.
Running out of options
The BoJ’s increasingly radical stimulus efforts are being closely watched by other global central banks which are also struggling to revive growth, such as the European Central Bank.
Many investors fear central banks have nearly exhausted the limits of what monetary policy can do, putting pressure back on governments to step up spending.
“If monetary policy has effectively reached its limits, which appears to be the case, greater emphasis will now have to be placed on fiscal policy and structural reform to raise inflation and trend growth,” ANZ Bank economists Tom Kenny and Brian Martin said in a note to investors about the situation in Japan.
Kuroda said: “I don’t think the BoJ has become cornered. We’ve changed the policy target. But we haven’t abandoned our previous policies. We’ve simply strengthened them.”
Kuroda has been unable to weaken the yen despite BOJ adopting negative rates, while buying 1/3 of government bonds and 60% of the ETF market pic.twitter.com/qamURdaE7T— Mark Constantine (@vexmark) September 21, 2016