- Pressure is rising for the BOJ to implement additional monetary easing
- Out of the limited number of options available, what method can the BOJ use?
- Our Chief Japan Economist Takashi Miwa discusses necessary preconditions and options for further easing by BOJ
Inflationary pressures in Japan have recently started to ease. This slowdown in inflation momentum, together with the instability in the financial markets and the concerns about an economic downturn that are also part of the reason for this slowdown, might cause both the financial market participants and even the Japanese government to step up their pressure on the BOJ to implement additional monetary easing.
On the surface, the options available to the BOJ in order to implement additional monetary easing appear to be very limited. One option would be for the BOJ to lower its short-term policy rate and its target for the 10-year JGB yield, but concerns have been growing both within and outside the BOJ about the negative side-effects of a prolonged period of low interest rates, and we therefore do not see this as a realistic option for further easing.
Another option would be for it to increase its purchases of ETFs, but here too the BOJ would be likely to face severe criticism about the negative effects of this on the liquidity of specific stocks and on corporate governance. At the same time, however, it could be argued that the BOJ has already, in its July 2018 policy revision statement, given itself the flexibility to increase or decrease its ETF purchases without explicitly having to adjust its purchase target.
The other option available to it as a way of achieving additional monetary easing would be for the BOJ to allow the pace at which it increases its long-term JGB holdings to accelerate again. The pace at which the BOJ purchases long-term JGBs has recently been well below the target of approximately JPY80trn per year that it has maintained in its guidelines for monetary operations. This, in our view, implies that it has considerable scope to implement additional monetary easing by increasing its purchases of long-term JGBs.
However, there are substantial barriers in the way of BOJ speeding up its JGB purchases again. This is because, if the BOJ were simply to increase its JGB purchases, this would push market interest rates down further and thus heighten concerns about the negative side-effects of a prolonged period of low interest rates. It therefore appears that the necessary preconditions for the BOJ to consider speeding up its JGB purchases are, first, that the government must implement measures aimed at stimulating demand, for example by increasing government spending, and second, that this must put upward pressure on market interest rates via the resulting increase in JGB issuance and expectations of increased JGB issuance. Although the BOJ has not exhausted all the means available to it to implement additional monetary easing, it might only be able to implement this easing reactively, once the necessary precondition of an increase in government spending has been met.
Chief Japan Economist