What do you do for the remaining year?

Kuroda Bank of Japan Monetary Easing and Yen Depreciation Dilemma April 11 17:27

The term of office of Governor Kuroda of the Bank of Japan is less than one year left.

Governor Kuroda, who has supported the Japanese economy with the aim of completely breaking out of deflation through large-scale monetary easing, also known as "Kuroda Bazooka," has not been able to achieve the 2% price target that he had set to achieve in about two years9. It's been a year.

And now, with the depreciation of the yen against the backdrop of monetary easing, we are in a new dilemma.

Finally achieved?

Price target of 2%

"Consumer prices could grow by about 2% after April,"

Kuroda said at a press conference last month that inflation could reach 2%.

When he took office as president in March 2013, he declared that he would achieve the price target of 2% in about two years.

After nine years, the arrival is just around the corner.

However, at the same time, Governor Kuroda repeatedly emphasized the stance of continuing the current large-scale monetary easing.


Governor Kuroda pointed out that rising prices due to energy prices may cause the economy to slow down due to negative corporate profits and an increase in the burden on households.

"Of course, monetary tightening shouldn't be done, and it's not appropriate," he strongly denied the possibility of monetary tightening.

The Bank of Japan is aiming for a "stable" rise in prices due to the virtuous cycle of the economy accompanied by rising wages and rising demand.

This rise in prices is an "undesirable rise in prices" due to the rise in energy prices, and it is necessary to continue monetary easing and support the economy.

"Another dimension relaxation" that becomes normal

March 2013.

The Japanese economy was suffering from deflation and the appreciation of the yen, where prices fell.

Immediately after he took office, Governor Kuroda said that he would achieve the price target of 2% in about two years, and set out a policy to significantly increase the purchase of government bonds and supply a large amount of funds to the market.

A large-scale monetary easing policy called "Kuroda Bazooka" or "another dimension".

As a result, the super-strong yen was corrected and stock prices rose, and prices, which had been negative, turned to rise.

However, after that, price movements stagnated.

In order to overcome the situation, in January 2016, it was decided to introduce the first "negative interest rate policy" in the history of the Bank of Japan.

In September, we introduced "long- and short-term interest rate manipulation = yield curve control" that keeps long-term interest rates at around 0% after making short-term interest rates negative while continuing large-scale monetary easing.

Still, the inflation rate does not reach 2%.

Then, in April 2018, Governor Kuroda, who entered the second term, stopped showing the time to reach the price target of 2%, which had been repeatedly postponed, so that monetary easing, which was a "different dimension", will become normal. It became.

The dilemma you face

And now, the Bank of Japan, led by Governor Kuroda, is facing new challenges.

It is a dilemma of monetary easing and the depreciation of the yen.

1 dollar = 125 yen level.

On the 28th of last month, the yen depreciated against the dollar for the first time in 6 years and 7 months in the foreign exchange market.

On this day, the depreciation of the yen further accelerated when the Bank of Japan announced that it would implement a measure called "continuous limit operation" for the first time to buy unlimited government bonds at a specified yield in order to curb long-term interest rates.

In just three weeks, the yen depreciated by 10 yen and the dollar strengthened.

The background is the difference in the direction of monetary policy between Japan and Europe and the United States.

The US is rushing to raise interest rates to curb historic inflation, while the Bank of Japan has made it clear that it will continue monetary easing.

The continuous limit operation is a powerful measure to curb long-term interest rates by any means, and investors are strongly aware of the widening interest rate differential between Japan and the US, and sell low interest rates in yen, and higher yields can be expected. The move to buy dollars has accelerated.

"The depreciation of the yen has pushed up both the economy and prices throughout, and the basic structure remains the same, which has a positive effect on the Japanese economy,"

Kuroda repeatedly explains the merits of the depreciation of the yen.

Certainly, the depreciation of the yen will increase the price competitiveness of exporting companies and boost overseas profits.

On the other hand, the real effective exchange rate, which shows the strength of the overall currency, has fallen to the lowest level in about 50 years.

In the current situation where energy prices such as crude oil and raw material prices such as grains are soaring due to Russia's invasion of Ukraine, it will push up import prices and lead to further rises in raw material prices, and the disadvantages are greater. Many experts point out that the yen will depreciate badly.

Continued monetary easing could lead to a further depreciation of the yen, accelerating "undesirable price increases" and adversely affecting the Japanese economy.

On the other hand, if we take steps toward tightening monetary policy, there is concern that the Japanese economy, which has been barely picking up due to the effects of the new coronavirus, will cool down.

The Bank of Japan is in a dilemma of risking a recession no matter which one it chooses.

What do you do in the future?

In a difficult dilemma, Kuroda's term of office is less than one year left.

What do experts think about the measures that Governor Kuroda should take in the future?

Mr. Eiji Maeda, who has been managing monetary policy as a director under President Kuroda and is currently the president of Chibagin Research Institute.

First, I would like to look back on President Kuroda's past nine years.

President Maeda of Chibagin Research Institute

"We have taken bold mitigation measures with a drastic policy. We squeezed 2% of the price target into people and worked to radically change our thinking, but prices did not rise. It was not easy to change the price perception familiar to the Japanese, and it did not go as expected. On the other hand, the economy clearly improved, and the part that made a certain contribution as a monetary policy can be positively evaluated. "

He also said that the monetary policy he was involved in had to be compared to athletics and the BOJ's response had to change.

President Maeda

"In the first three years, I ran 100 meters in the short-term decisive battle, but gradually it became a marathon of 1500 meters, 10,000 meters. As the distance I run becomes longer, I have to run while paying attention to the weather and road conditions. As is the case, policy management is now in a situation where risk management is more required. "

He points out that there may be no major changes to the current large-scale monetary policy during the remaining term.

President Maeda

"Unlike the United States, the economic recovery from the corona disaster is slow. There is a possibility that the rise in resource prices will have a negative effect on the economy. It's difficult and unlikely to be clearly fixed. "

Sayuri Kawamura, a senior researcher at the Japan Research Institute, who is familiar with monetary policy, praised Kuroda's ability to improve the Japanese economy at the beginning of his inauguration, but said that the effects of monetary easing did not last long. Insists that it should move towards amending monetary easing.

Senior Researcher Kawamura, Japan Research Institute,

"The world economy has been in a state of low growth, low interest rates, and low inflation, but that situation has changed dramatically, mainly in Europe and the United States. Flexible monetary policy management is desired rather than the rigid approach of maintaining it as it is. "

Kawamura pointed out that it could be an option to show an attitude to consider reviewing the yield curve control.

He also mentioned the so-called exit policy to normalize large-scale monetary easing.

Senior Researcher Kawamura

"It is a difficult situation to reach the end of the term without touching on the exit policy. I am responsible for promoting large-scale monetary easing so far, and I firmly explained the future outlook to the people. It may be necessary to cooperate with the financial authorities. "

As the two point out, market participants have different views over the next year.

While there is a view that monetary policy will be maintained during the term of President Kuroda, there is also a view that some amendments will be made, such as making yield curve control more flexible.

In that case, it is mentioned as a method that is expected to expand the fluctuation range of long-term interest rates from the current "± 0.25%" and to switch the target of interest rate adjustment from 10-year government bonds to 5-year government bonds.

Furthermore, the observation that "it may be a way to the exit" is smoldering.

How to deal with the remaining one year?

What is the next president?

The last year of President Kuroda, who has been in office for the longest time in history.

At this point, Governor Kuroda has maintained a stance of persistently continuing monetary easing toward a "stable" rise in prices.

How will he deal with the dilemmas he faces and baton-touch the next governor amid growing uncertainties, such as the situation in Ukraine?

And will the next president be a person who will inherit the Kuroda route, which has promoted monetary easing, or will he appoint a person with a different stance in order to make a bold policy change?

This year, including the appointment of the president's successor, will be extremely important for the Japanese economy in the future.