FORMER Bank of Japan member Sayuri Shirai fondly remembers when the bank decided on a massive programme intended to perk up the world’s No3 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-per cent 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 said.
“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.
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.”
Shirai says Kuroda “really thought” his policy would spark inflation of two per cent. But as inflation refused to spike up, the bank kept putting off its deadline, eventually dropping any timeline to reach its two per cent 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.