Assessment of Bank of Japan’s Policies: Identify Effectiveness, Limitations So Lessons Can Be Learned

Editorial

17:09 JST, January 13, 2025

Japan has suffered from a prolonged period of deflation and economic stagnation unprecedented among industrialized nations. It is essential that the Bank of Japan applies to its policy management the results of its assessment into the effectiveness and limitations of the monetary easing measures it has taken.

The central bank has released its “Review of Monetary Policy from a Broad Perspective,” which assessed the effectiveness of its monetary policy measures over the past 25 years. At the direction of BOJ Gov. Kazuo Ueda, who took office in April 2023, the central bank compiled the review with extensive input including from outside experts.

The Japanese economy slipped into deflation with prices falling continuously in the late 1990s as the issue of nonperforming loans at financial institutions became more serious. The central bank introduced a series of unprecedented policies to prop up the economy, including a zero interest rate policy in 1999 and a quantitative easing policy in 2001.

Since Japan has had a number of experiences that are somewhat unique among major industrialized countries, it is highly important to go over an evaluation of the policies.

The focus of the evaluation was the unconventional monetary easing policy adopted in spring 2013 by former BOJ Gov. Haruhiko Kuroda, who set a price stability target of 2% to be achieved within about two years.

The review pointed out side effects, such as dysfunction in the Japanese government bond market. The review then summarized that the monetary easing had pushed up economic activity and prices to some extent, and it also contributed to Japan’s economy moving out of a state of deflation. Therefore, the overall effect on the Japanese economy appears to have been “positive.”

However, the review also acknowledged the limitations of the monetary easing, stating that its impact was “not as large as expected at the time when it was introduced.” It can be said that the review gave a generally fair assessment.

What the review lacked was an in-depth evaluation of the relationship between monetary policy and the foreign exchange market.

The aim of monetary policy is stabilizing prices, thus dealing with exchange rates is not a direct objective.

In reality, however, policy rate movements have a significant impact on the foreign exchange market. Before the COVID-19 pandemic, the problem of an excessively strong yen that undermined export competitiveness weighed heavily on the Japanese economy, and the central bank surely took this into consideration.

However, today, overseas payments are ballooning in the digital and energy sectors, resulting in huge trade deficits, an excessively weak yen and high prices.

For Ueda to proceed with normalizing monetary policy, deepening analysis of these issues as well will be necessary.

The central bank’s purchase of a large amount of JGBs to contain long-term interest rates has faced strong criticism over it leading to the loosening of the government’s fiscal discipline. However, the review also avoided making an in-depth evaluation of this point.

The central bank probably believes that working on fiscal policy is out of its purview. If so, it would be worthwhile to assess it under a separate framework that includes the government and other parties.

(From The Yomiuri Shimbun, Jan. 13, 2025)