Kristian Rouz — Several members of the Bank of Japan's (BOJ) Policy Board believe the central bank should re-evaluate its policies of bond purchases and zero-to-negative interest rates (ZIRP and NIRP) from the standpoint of their downsides and risks to monetary stability.
This according to the newly-released minutes from a BOJ policy meeting back in July — but more recent statements from BOJ officials support the view that policymakers are increasingly skeptical of the ultra-accommodative monetary policies.
"This means that, in continuing with powerful monetary easing, we now need to consider both its positive effects and side-effects in a balanced manner," BOJ Governor Haruhiko Kuroda said Tuesday, addressing a gathering of business leaders in Osaka.
The statements come as Japanese Prime Minister Shinzo Abe is engaged in trade discussions with the US, suggesting that possible changes in BOJ policies could complement a future bilateral trade deal.
Kuroda said the central bank will now look at not only the benefits of the ultra-loose monetary policies, but will also take into account the mounting challenges posed by an extended period of low interest rates. He stressed zero-and-negative rates wouldn't be kept permanently, adding interest rates will go up once inflation starts exceeding the 2-percent target on a sustainable basis.
Meanwhile, Policy Board members warned back in July that the ultra-loose monetary conditions have hampered the profitability of commercial banks due to the low interest charged on their issued loans.
This despite low-interest rate policies being originally designed to support loan issuance — roughly ten years into the unconventional stimulus, its effects start to fade, BOJ officials warned.
"Although the current monetary easing has not caused any large problems in financial intermediation… it is important to take into account the two different time-frames in which both the positive and negative effects (of such a policy) appear," an unidentified BOJ board member said, according to the minutes.
"Financial intermediation problems" means the low bank profits from loans, which hampers commercial bank loan issuance in the future. Many of Japan's banks are urging an increase in interest rates, saying higher borrowing costs in the growing economy could revitalize the nation's financial sector.
But BOJ Governor Kuroda is unconvinced, saying any hikes in central bank interest rates should be justified by the economy achieving the 2-percent inflation target.
"The BOJ may take further steps to address the side-effects of its policy, such as the impact on financial intermediation. But such steps would be taken to maintain powerful monetary easing, not to deny it," Kuroda said at the business forum in Osaka.
Kuroda also said that there is an understanding between the central bank and the Abe cabinet that 2-percent inflation is the BOJ's main target at this point. Japan's inflation rate stood at 1.3 percent in August, compared to just 0.6 percent in April, and 1.4 percent in January, as well as 0.7 percent last September.
The numbers suggest that Japan's inflation is still unsustainable and below the 2-percent target, suggesting the BOJ's ultra-loose monetary policies could remain intact for a while. However, the Japanese economy is exposed to the effects of foreign trade, meaning a rise in the costs of imports would inevitably drive domestic inflation.
PM Abe and US President Donald Trump are currently discussing a possible bilateral trade deal, which some reports have suggested could increase Japan's imports of agricultural goods and energy from the US.
In order to facilitate such a realignment in foreign trade, the Japanese central bank might consider some adjustment in its policies, whilst the imports of the more expensive US goods could drive domestic prices and inflation in Japan as well — justifying the move.
The BOJ's policies have supported Japan's exports over the past few years, as low-interest rates typically render the national currency weaker, making national exporters more competitive in the international markets — while punishing the importers. However, an imports-focused trade agreement with the US could require some tapering of the BOJ's massive stimulus.
"Under such a fairly complex economic and price situation, monetary policy must take into account various developments in a comprehensive manner," Governor Kuroda said.
For his part, PM Abe said last week his economic policy goals have been achieved, with sustainable economic expansion and low unemployment — meaning the government won't be pressuring the BOJ to keep its interest rates low. But Kuroda warned against jumping to hurried conclusions, stressing any changes in policy would be data-dependent and gradual.
"The BOJ will continue to make its utmost efforts to firmly support corporate activity, taking into account economic, price and financial developments," he said.