The excuses of, and a new challenge for, The Bank of Japan (Part 1)

The excuses of, and a new challenge for, The Bank of Japan (Part 1)

In mid-September, The Bank of Japan (BOJ) held its monetary policy meeting. This is a regular meeting held 8 times a year to decide their monetary policy. However, this time it garnered particular attention from those related to the markets. There are two reasons for this. Firstly, a review of the "monetary easing" that has taken place since Mr. Kuroda, former finance bureau member, was appointed as governor of the BOJ at one of these meetings in March of 2013 was announced beforehand.

Second, the overall results of, and high possibility of additional financial easing. This time, we'll be talking about "a review of the monetary easing" and "new monetary easing" in parts one and two respectively.

First, let's cover a review of the monetary easing so far.

Mr. Kuroda has consistently announced that "we will take any and all steps" with regards to the issue of escaping deflation. True to this word, he pushed ahead with large scale financial easing known as the "Kuroda Bazooka", and other monetary policies directly after being instated.

However, the consumer price index fell by 6 consecutive points up to August of 2016, and indicators of another deflation rush have been beginning to appear.

So far the BOJ has bought up government bonds held by banks, and dropped the price of the yen by expanding the monetary base (the supply of funds held by the BOJ) by seemingly "splashing around" money, leading to inflation. Mr. Kuroda evaluates this quantitative easing saying "economic activity and prices will turn around, and the sustained decline of the Japanese economy mean this has ended deflation.

Indeed is true that the Kuroda Bazooka led to a turnaround in the trend towards falling stock prices and a high yen, leading to an economic turnaround. Although there currently seems to be somewhat of a stalemate when it comes to the situation described above, Mr. Kuroda has commented that due to "crude oil price decline, uncertainty relating to emerging economies, global fluctuations in the financial markets, and the consumption decline after the consumption tax hike" their goals have been hindered. Further, it has been analysed that "growth of money supply and inflation expectations are not closely linked".

To roughly sum it up, he seems to be claiming "we couldn't achieve our goals due to oversea factors", and "simply continuing the same type of monetary easing will make our goal (inflation at 2%) hard to reach. In the end, it seems to be an acknowledgement that controlling the economy and prices using only financial policy is difficult (though perhaps this should have been obvious).