Modest Stimulus Measure Signals Possible Retreat at Bank of Japan
In its lukewarm easing actions, the central bank may be acknowledging limits of monetary policy
TOKYO—The Bank of Japan may have begun to retreat from its “whatever it takes” policy stance, effectively shifting pressure to the government to use fiscal spending and structural changes to help revive the economy.
The central bank announced only a modest dose of monetary stimulus Friday, disappointing investors who expected a bolder move to complement a new government spending package.
That alone was taken as confirmation by many economists that the BOJ has run up against the limits of monetary policy. The BOJ’s plan, also announced Friday, to conduct a “comprehensive assessment” of the effects of its policies at the next policy board meeting in September underscored that conclusion.
It will be the first such review since BOJ Gov. Haruhiko Kuroda unleashed what investors dubbed a “monetary bazooka” in early 2013, vowing to achieve 2% inflation within two years by taking bold, pre-emptive action anytime that price goal appeared threatened.
More than three years later, the central bank’s goal is out of reach for at least the next year, according to the most optimistic estimates. And Japan’s economy has sputtered in recent quarters, contributing to a growing global consensus that monetary policy alone won’t be enough to rescue developed economies from stagnation.
“I wouldn’t say everything has gone badly, but I also wouldn’t say everything has worked well,” Mr. Kuroda said at a news conference Friday.
Mr. Kuroda dismissed suggestions that the central bank had run out of ammunition. He noted that it nearly doubled its purchases of Japanese exchange-traded funds to ¥6 trillion ($57 billion) annually, up from ¥3.3 trillion. He said there was still room for additional purchases of Japanese government bonds, and to push a negative interest rate on some bank reserves even lower.
But the BOJ’s actions—or lack of them—may have sent the stronger message. Despite high expectations and pressure from the government to act, the central bank didn’t expand its JGB purchases—the main pillar of its quantitative easing program—and didn’t cut that interest rate.
People at the BOJ have suggested that it couldn’t significantly expand its JGB purchases from the current ¥80 trillion annually without straining the market. The BOJ owns more than a third of outstanding JGBs, with its balance sheet rising to 85% of gross domestic product as of May.
Now the BOJ will examine that impact of its JGB purchases on the market as part of its policy assessment, which will look at the effects and drawbacks of its easing measures, Mr. Kuroda said. The central bank will also examine how low short- and long-term interest rates have affected the health of commercial banks, he said.
Mr. Kuroda said he and the other eight board members will “candidly examine what is needed ... to achieve our 2% price-stability target at the earliest possible date.”
Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute, was among economists who concluded from the BOJ’s actions and Mr. Kuroda’s words that quantitative easing had reached its limits, and was looking for a way to make them more sustainable in a longer battle against deflation than originally expected.
Mr. Nagahama said he thought the BOJ might use the policy review to make the case for gradual changes, including dialing back its purchases of JGBs, which he said are unsustainable at ¥80 trillion annually.
Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, said that in addition to scaling back its JGB purchases, the BOJ may also “freeze” negative rates, which are deeply unpopular with banks and the public.
Mr. Kuroda hasn’t ruled out the possibility of undertaking additional action if the result of the analysis calls for it.
The BOJ could also use the policy review to more clearly spell out its views on the need for additional monetary stimulus, including further rate cuts, while addressing the perceived risks, according to Masaaki Kanno, chief economist at JPMorgan Securities.
Mr. Kanno said the “odds are high at the moment that the BOJ will both increase its JGB purchases and push interest rates further into negative territory in September.”
Yet even if the BOJ stood pat indefinitely, its current policies amount to extraordinary monetary stimulus. The yen, though considerably stronger than it was a year ago, remains much weaker than when Mr. Kuroda took office. A weak yen has been a key element of Mr. Abe’s growth program.
A person close to the government said Finance Ministry officials share the view that it is time for Mr. Abe’s government to deliver the more-robust fiscal spending from long-term perspectives and structural overhauls necessary to revive the economy. Monetary easing, while necessary, will continue but will play a more complementary role, the person said.
Mr. Abe said Wednesday that he would announce a ¥28 trillion spending package next week, though actual new spending is expected to be a fraction of that. In June, he pushed back a sales-tax increase scheduled for next year until 2019, part of a shift toward looser fiscal policy to address sputtering growth.
Mr. Abe’s advisers had called on the BOJ to expand its easing simultaneously. The BOJ showed a willingness to be part of the effort in Friday’s policy statement, saying it believed its increased purchases of ETFs and existing loose monetary policy would produce “synergy” with the Abe government’s efforts.