The excuses of, and a new challenge for, The Bank of Japan (Part 2)

The excuses of, and a new challenge for, The Bank of Japan (Part 2)

Previously we talked about the review of the monetary easing carried out by the Bank of Japan. The review essentially concluded that "achieving the goal of 2% inflation will be difficult by only continuing conventional monetary easing". In order to break out of this position, the new monetary policy framework launched by the BOJ is "Quantitative and qualitative monetary easing with long and short term interest rate options (Yield curve control)". Obviously that's quite a mouthful, and a phrase the layman might have some difficulty with.

To explain it briefly, it means a shift from the conventional "expanding monetary base by buying 80 trillion yen of government bonds a year" method to "buying government bonds with the long term interest rates (10 year government bond yields) adjusted to near 0%". Further, they made clear their policy of continuing monetary easing until inflation is stably above 2%. Placing long term interest rates as their pivot point for monetary policy is essentially a world first, and seems to the first time this has been attempted in history.

Under the new framework, the limits on government bond purchases will be the same as they have been so far at 80 trillion yen. However, simply because there is a possibility of a large reduction due to long term interest trends, the current framework can also be seen as "a tapering off towards exiting easing". On the other hand, there is the view that "continuation of easing has been secured" since it will continue as long as the target has not been reached, and there are various debates erupting over this domestically. However, both positive and negative factions seem to agree that "the goal cannot be reached without cooperation from the government such as government spending and deregulation".

The BOJ's government bond holdings have already exceeded 400 trillion yen, and if the easing continues at this rate they will reach 500 trillion by the end of 2017. This is a level comparable to Japan's GDP. When this policy finally reaches an end, who knows what kind of chaos will be waiting. This is something no country has experienced, and hard to imagine.

However, one certainty is that with the introduction of this new framework the end of this monetary easing will not occur within the next 2 or 3 years. In the meantime, the BOJ will continue to yearly buy nearly 80 trillion yen of government bonds, 6 trillion in ETF, and 900 billion in REIT. There may be an increase or decrease in amounts. While the moratorium for investors may continue for the time being, during this time will the Japanese government strive to solve the fundamental problems? These points are vital for predicting the future of Japan over the next 20 or 30 years.