Japan shifts to long-term strategy in battle to end deflation: The Japan News

Haruhiko Kuroda, governor of the Bank of Japan (BOJ), speaks during a news conference at the central bank's headquarters in Tokyo, Japan, on Sept 21, 2016.
Haruhiko Kuroda, governor of the Bank of Japan (BOJ), speaks during a news conference at the central bank's headquarters in Tokyo, Japan, on Sept 21, 2016.PHOTO: BLOOMBERG

In its editorial on Sep 23, the paper says a joint effort will be needed to ensure increase in prices.

To tenaciously push ahead with monetary easing to overcome deflation, it is necessary to thoroughly monitor the effectiveness of policy and its side effects.

The Bank of Japan (BOJ) has hammered out a new policy framework for monetary easing that focuses on the long-term interest rate.

After assuming his current post in spring 2013, BOJ Govenor Haruhiko Kuroda launched "a new dimension of monetary easing," laying out a goal of "realising 2 per cent inflation in two years."

This goal has yet to be achieved even now - 3½ years later. It has been pointed out that the BOJ's massive Japanese government bond purchases have their limit and that there are side effects from the bank's negative interest rate policy.

The new policy adopted by the bank at this phase is apparently aimed at shifting its monetary policy from the short-term battle that the BOJ initially intended to a long-term fight. This judgment is reasonable.

The main pillar of the new policy is to manipulate interest rates by purchasing Japanese government bonds in an attempt to guide the long-term bond yields to around zero percent.

The bank will raise ultra-long-term interest rates, which have dropped excessively because of the bank's negative interest rate policy.

The central bank appears to have given consideration to the deterioration of earnings at financial institutions due to falling interest rates, as well as to difficulties involved in the management of pension and insurance funds.

While maintaining its purchases of ¥80 trillion (S$1.07 trillion) a year of Japanese government bonds, the central bank will also buy a wide variety of the bonds without being particular about their maturity.

The bank is aiming to increase the sustainability of its monetary easing policy by shifting its emphasis from quantity to interest rates while taking a more flexible approach to the way it purchases Japanese government bonds.

The bank also clarified its policy of continuing monetary easing for the long term, without setting a deadline, until the 2 per cent inflation target is stably realised.

Why don't prices increase?

The biggest reason, as the central bank pointed out after examining the effectiveness of its past policies, is that expectations that prices will increase are not growing among companies and households.

Because deflation has persisted for two decades, the perception that "prices won't increase anyway" has spread and persisted in the country. It is not easy to get out of this situation in a short period of time.

The bank must keep in mind that dialogue with the market is key to the implementation of its new policy. Unless the bank's judgment wins trust, confusion will arise in the market.

Success or failure of the unconventional policy targeting the long-term interest rate hinges on communication with the market.

As long as the central bank pursues a long-term battle, it is necessary to change the "surprise approach" that Kuroda has made great use of and enhance the predictability and transparency of the bank's monetary policy.

Needless to say, monetary policy alone will not realise price increases.

The government needs to boost the potential growth rate by pushing through its growth strategy, and companies need to strive to divert their internal reserves to investment and pay increases.

Ending deflation is only possible when the public and private sectors jointly tackle it.

* The Japan News is a member of The Straits Times media partner Asia News Network, an alliance of 21 newspapers.