Central Bank Must Explore Concrete Measures to Modify Monetary Easing Policy

How will the Bank of Japan mitigate the side effects of massive monetary easing while continuing that selfsame easing? The BOJ faces difficult challenges upon the inauguration of its new top lineup.

Kazuo Ueda, an economist, became the Bank of Japan’s new governor on Sunday. Deputy Govs. Ryozo Himino and Shinichi Uchida assumed their posts in March and the new BOJ order is now fully established. All three men will serve a five-year term.

The environment surrounding the Japanese economy has changed drastically since the central bank began its massive monetary easing measures 10 years ago.

The economic recovery from the COVID-19 pandemic and Russia’s invasion of Ukraine have given rise to global inflation. While central banks in the United States and Europe have been hiking interest rates, the BOJ has continued with its monetary easing policy.

Ueda intends to maintain the current policy of achieving a 2% inflation target, but the bank’s easing measures are causing noticeable side effects. Some critics say this has caused the yen to weaken, spurring higher prices.

Ueda needs to explain to the public in an easy-to-understand manner the reasons for continuing with monetary easing.

The new BOJ governor is scheduled to participate in a meeting of finance ministers and central bank governors of the Group of 20 major economies in the United States from Wednesday. Later this month, he will attend his first monetary policy meeting as governor. Ueda must strive to convey detailed information in a careful manner.

In terms of policy management, Ueda will be tested over whether he can formulate and implement specific measures to mitigate the side effects of the monetary easing policy.

Ultralow interest rates have worsened banks’ profits, and the BOJ’s massive purchases of government bonds have reportedly created distortions in the government bond market. It also has been argued that the policy of containing long-term interest rates has reduced the burden of interest payments on government bonds, leading to a slackening of the nation’s fiscal discipline.

Speaking in the Diet, Ueda said such side effects as distortions in the government bond market from the ultraloose monetary policy “can’t be denied,” implying that the policy could be revised. However, he made no mention of how this could be achieved.

It is important for the central bank to modify policies flexibly after carefully examining the effects and adverse impacts of its current policies.

A succession of medium-sized banks collapsed in the United States in March, sparking credit concerns among European financial giants. Financial instability continues to smolder around the world.

The U.S. Federal Reserve Board’s rapid increase in interest rates is believed to be one of the reasons for the U.S. bank failures.

For its part, the BOJ decided in December to allow wider fluctuations in the long-term interest rate that it had been guiding to around 0%, but the market perceived this move as a rate hike. Some observers say a re-expansion of the fluctuation range will be a focal point of the bank’s policy revision.

In revising its policy, the BOJ must exercise extreme caution to avoid disruption to financial markets and the operations of financial institutions.

(From The Yomiuri Shimbun, April 9, 2023)