EDITORIAL: BOJ must free itself from the shackles of state policy
The Bank of Japan has decided to open the monetary spigot further. The central bank said July 29 that it will double its annual purchases of exchange-traded funds (ETF) to 6 trillion yen ($58.8 billion).
The BOJ’s action came as a response to a request for further monetary expansion from the Abe administration, which will soon unveil a huge package of policy measures to stoke economic growth. The program will come in at 28 trillion yen.
The central bank has already taken radical steps to pump money into the economy, by setting negative interest rates and making massive purchases of government bonds. As experts have warned that expanding these measures would be ineffective and even harmful, the BOJ, apparently under pressure to play ball with the government, resorted to one of the few remaining options.
The thinking behind the monetary policy is to ensure that the Japanese economy will continue stable and sustained growth.
It is doubtful whether the central bank’s latest move will serve this purpose.
In the latest of its quarterly “Outlook for Economic Activity and Prices” report, released on July 29, the BOJ said the economy “has continued its moderate recovery trend” and “is likely to be on a moderate expanding trend.”
A clutch of economic indicators confirmed the BOJ’s assessment, indicating the economy is on a stable footing. The ratio of job offers to job seekers has risen above 1 in all the 47 prefectures for the first time since such records started being kept.
Even though there is a degree of uncertainty in European and emerging economies, no compelling case can be made for putting together an outsized package of economic stimulus measures at this moment. The BOJ should have taken exception to the administration’s plan, but the central bank has instead provided support to the administration through the additional monetary easing.
The BOJ deserves to be criticized for following the government’s lead into a questionable move.
Two of the nine members of the BOJ’s Policy Board, which makes the bank’s policy decisions, voiced opposition to the proposal to increase the purchases of ETFs, investment vehicles traded on stock exchanges.
They argued, quite reasonably, that the step would have negative effects on price formation in the market. But such dissenting voices within the central bank’s policy-making body are now more unlikely to be heard than before because the Abe administration has replaced retiring members with supporters of the prime minister's "Abenomics" economic policy. The two members opposed to the latest action are both private-sector economists who joined the Policy Board before Shinzo Abe returned to power in December 2012.
If the Policy Board is dominated by similar-minded members, it will lose its ability to check the aggressive and controversial “different dimension” monetary expansion policy that has been promoted by BOJ Governor Haruhiko Kuroda.
We are concerned that the BOJ might become even more inclined to adopt a monetary policy supportive of the administration’s agenda.
But the Policy Board should be given credit for refraining from an expansion of the negative interest rate policy, which could put an additional strain on the financial health of banks, and also from an increase in the amount of government bonds bought by the BOJ, which could be seen as the central bank’s attempt to finance government spending.
Markets had warned that failing to take these steps would trigger the yen’s upswing as well as a major stock market decline. But this view itself reflects a distorted relationship between monetary policy and financial markets.
The BOJ’s excessive monetary expansion is now doing more harm than good to both companies and households.
The negative interest rate policy has delivered a serious blow not just to banks but also to pension funds whose investment plans have gone awry due to the measure.
To bring its monetary policy back to a normal state, the BOJ should start mapping out an exit strategy for its different dimension monetary easing program as soon as possible.