Haruhiko Kuroda, the new governor of the Bank of Japan, has launched a monetary policy revolution. He has ended two decades of caution, during which the BoJ declared itself helpless to end deflation. Prime Minister Shinzo Abe’s goal of a two per cent inflation target within two years is ambitious – and Mr Kuroda now has a bold policy to meet it. The question is whether the policy will work? My answer is: on its own, no. The government must follow up with radical reforms.
On April 4, the Bank of Japan announced the launch of “quantitative and qualitative easing”. It promises to double the monetary base and to more than double the average maturity of the Japanese government bonds (JGBs) that it purchases. The monetary base will rise at an annual rate of ¥60-70tn ($606-$707bn or 13-15 per cent of gross domestic product) and the average maturity of holdings of JGBs will increase from 3 to 7 years. Furthermore, says the BoJ, it “will continue with the quantitative and qualitative monetary easing . . . as long as it is necessary.”
This is not “helicopter money”, since the intention is to reverse the monetary expansion when the economy recovers. This is also not an outright purchase of foreign assets, as the Swiss National Bank has done. This is, instead, in the words of Gavyn Davies, chairman of Fulcrum Asset Management, “an outsize dose of internal balance sheet manipulation”, designed to encourage the financial sector to shift from holdings of JGBs and to raise the prices of real assets. Nevertheless, a weaker exchange rate is surely a desired consequence.