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Bank of Japan mired in ‘mission impossible’ against deflation
TOKYO, Sept 20, 2018 (BSS/AFP) – Former Bank of Japan member Sayuri Shirai
fondly remembers when the bank decided on a massive programme intended to
perk up the world’s number-three economy and save it from damaging deflation.
“It was a very exciting time,” recalls the 55-year-old. “Globally a lot of
people praised this massive monetary easing, the market reacted positively,
so I think I was really lucky. It was a really good experience.”
It was 2013. New Governor Haruhiko Kuroda was blowing fresh air into a
stuffy institution, and there was a sense of optimism that his “Bazooka”
approach to monetary policy might finally help Japan beat crippling
deflation.
Deflation — or falling prices — is dangerous for an economy as consumers
defer purchases hoping goods will become cheaper. This harms consumption and
therefore stifles growth.
Backed by Prime Minister Shinzo Abe and his “Abenomics” policy, Kuroda
injected first between 60-70 trillion, then 80 trillion yen ($714 billion) a
year into the Japanese economy by buying government bonds and other assets,
including corporate bonds.
The idea was to flood the banking system with easy cash, in the hope that
banks would pass on loans at cheap rates to consumers, encouraging them to
spend and boost the economy.
“We got certain results. We achieved yen depreciation and higher corporate
profits,” says Shirai.
“Whether it is sustainable or not is another issue.”
Indeed, five years later, the BOJ appears to have painted itself into a
corner.
Inflation has stubbornly refused to tick up towards the bank’s two-percent
target; growth has remained sluggish and the bank is stuck in neutral,
without a major policy change in years.
The bank is in “deadlock,” Shigeto Nagai, head of the Japan department at
Oxford Economics told AFP.
“They can’t tighten, they can’t ease further from here. They have to stick
to the current policy but inflation will not rise,” added Nagai.
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To the surprise of no one, the bank held firm on its policy on Wednesday,
pledging to keep interest rates at ultra low levels for “an extended period
of time.”
– ‘I was so angry’ –
Shirai says Kuroda “really thought” his policy would spark inflation of
two percent.
But as inflation refused to spike up, the bank kept putting off its
deadline, eventually dropping any timeline to reach its two-percent target.
This reduced the BOJ’s credibility with markets, analysts say.
Kuroda’s mistake, in Shirai’s opinion, was the introduction of negative
deposit rates in 2016 — effectively charging banks to stash money at the
BOJ.
“I was strongly opposed to it. I was so angry. It was sort of breaking the
trust, the banking sector was shocked and they were not ready,” she said.
“It was also very negative for consumers. I think it was a disaster.”
Now, while other central banks around the world like the European Central
Bank and the Federal Reserve are tightening their monetary policy, the BOJ is
in a very delicate position, analysts say.
Even though it has maintained its asset buying target, the BOJ has
gradually started to reduce the actual amount of government bonds it buys per
year — dropping to around 40 trillion yen.
The bank also tweaked its monetary policy in July to pave the way for
future tightening but it will find it almost impossible to normalise the
situation, warns Shirai.
“Can we reduce it like the Fed is doing? The amount is so huge, I really
don’t see how we can reduce it,” warns Shirai.
The bank has now amassed assets equivalent to Japan’s entire gross
domestic product and any sign it is shedding these could cause turmoil in the
markets.
Nagai from Oxford Economics says low inflation is a structural problem in
Japan with its ageing population.
“Large portion of savings are in the hands of senior people and they don’t
spend a lot. Younger generations have more appetite for goods and products
and services but their pay is not high enough,” he said.
He said there was “little prospect” of hitting the target, even in 2021.
“Basically, we consider it will be stable around one percent and that is
kind of the ordinary temperature for this kind of ageing society.”
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