Mellowed BoJ adopts prudent flexibility

Bank of Japan (BoJ) comprehensively reviewed the sustainability of a series of daring policy decisions that it had taken since January at its meeting on Tuesday and Wednesday. The mellowed central bank weighed the effectiveness of these decisions and unveiled a massive overhaul of monetary policy. The latest steps to commit itself to stoking inflation over the longer term and kickstarting the flagging economy while holding on to further cut in interest rates into negative territory reflect the prudent flexibility that the bank — known for its aggressiveness and extraordinary stance — has adopted.
The recent BoJ meeting saw the bank moving away from its rigid target for
expanding the money supply and keeping the bond yields steady. It said its target for expanding the monetary base through asset purchases, earlier at 80 trillion yen ($780 billion) annually, may fluctuate in the short term to assist policy makers to focus on bond yields. The bank’s announcement to continue monetary easing until it stabilizes inflation at its 2.0 percent target is an expansion of easing its monetary policy. Interestingly, the BoJ statement has put the blame on its failure to hit its inflation target on crude price swings, an increase in sales tax in 2014 that influenced spending and plunging exports. The recent decision to
expand the monetary easing will come as good news for the overseas traders.
Since 2013 when Abenomics was launched, the BoJ has been giving impetus to fiscal measures to shore up economy. But these have delivered very limited results. A month back, Japan’s Prime Minister Shinzo Abe unveiled a 28 trillion yen package to give a renewed push to the sluggish economy. However, without a long-term goal, the package will fall flat. The policy has to be backed by the right monetary and fiscal stimulus. Only monetary easing and government spending will not yield the desired results.
Japan’s trade deficit is an area of concern. Trade deficit currently is 18.7 billion yen. The country’s exports have plummeted 9.6 percent from a year earlier. In August, exports came down for the 11th consecutive month. Vehicle, steel and shipment sectors recorded a massive downfall.
A wary BoJ realizes that economic revival will take time. And therefore, it has started shifting its focus towards long-term bonds. The bank will soon run out of government bonds it can purchase. So, it wants to scrap a target for its government bond holdings. Tsutomu Komiya, a debt investor in Tokyo, rightly says, “Long-term bonds are the place to be because they offer higher yields than shorter maturities.”
The recent Tankan survey of BoJ showed confidence among small firms and non-manufactures worsening during the second quarter of the year. The world’s third largest economy has to restore the business confidence. For this, it has to offer hope and incentive to traders. As a first step, the government has to cut the red tape which ails many industrialists today. Measures have to be adopted through which the exporters get back the lost competitive edge.
Structural economic reforms and deregulation have to be fast-tracked. There has to be a right mix of measures that enhances public spending and generates tax revenues. The challenge is daunting indeed, but obsession with conventional economic stimulus won’t help.