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From left: Nakaso with ACCJ President Christopher J. LaFleur and Vice President–Tokyo Andrew J. Conrad

From left: Nakaso with ACCJ President Christopher J. LaFleur and Vice President–Tokyo Andrew J. Conrad

It is becoming a ritual for investors, business leaders, and journalists. Once a month they wait with bated breath for the Bank of Japan (BOJ) to finish its policy meeting and announce the results. During his time in office, Governor Haruhiko Kuroda has sent the central bank on a daring course, surprising and shocking markets.

September’s meeting was more intensely anticipated than any in the previous three years. A “comprehensive assessment” of what the central bank calls “quantitative and qualitative monetary easing” was announced. In layman’s terms, this means increasing the overall amount of money in the Japanese economy, and placing some into specific institutions considered good for growth.

What did the BOJ have to say of its efforts, which began back in April 2013? “[Quantitative and qualitative easing] to a large extent has had the intended effects. Looking at financial and economic developments since the introduction of QQE, real interest rates have declined, reflecting increased inflation expectations and a decline in nominal interest rates across the entire yield curve. Against this backdrop, Japan’s economy is no longer in deflation, which is generally defined as a sustained decline in prices.”

In essence, the central bank feels it has done its part for growth—although it could do more. Most important, the bank has failed to reach its target of 2 percent inflation—by a lot.

Significantly, the BOJ has in recent times appeared to change strategy. Kuroda has been known to surprise the markets: Earlier this year, days before introducing a negative interest rate policy, he publicly insisted the bank would be doing no such thing. But now market watchers are getting a clearer picture before announcements.

At a September ACCJ meeting, BOJ Deputy Governor Hiroshi Nakaso laid out the case for his institution’s reasons to believe it had, by and large, succeeded in the past few years. He also made clear that there would be easing, which was unlikely to be wound back after the assessment.

“Through numerous discussions I have had with the leaders of financial institutions, I think I fully recognize the effects of the large-scale monetary policy on financial institutions and financial markets, and the likely impacts if the policy is to continue,” Nakaso said. “Based on this recognition, we will take measures that we judge necessary for Japan’s economy.”

His speech made clear that Nakaso believed—as the bank also proved to do, after its meeting later in September—that the bank’s actions had led to largely favorable circumstances for the Japanese economy.

“Based on a candid assessment, we will decide whether or not it will be necessary to make adjustments to the current policy framework and, if judged necessary, in what way it should be adjusted,” Nakaso added.

After the assessment, the BOJ expanded its policies, giving the new platform the catchy title “Quantitative and Qualitative Monetary Easing and Yield Curve Control,” explaining the meaning as follows: “The new policy framework consists of two major components: the first is ‘yield curve control,’ in which the bank will control short-term and long-term interest rates; and the second is an ‘inflation-overshooting commitment,’ in which the bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index exceeds the price stability target of 2 percent and stays above the target in a stable manner.”

Market reaction has been muted. The yen remains pegged at around ¥100/$1; the Nikkei 225 is way below its Abenomics highs of more than 20,000 points; and consumers are turning against the economic project.

Some analysts have gone as far as to suggest that the new project is effectively a pullback on previous commitments to bring Japan back to inflation, and amounts to the beginning of the end of the radical Kuroda era.

Others, including one member of the audience, wonder whether we are entering an era of perpetual easing.

“We are technocrats, and we are always thinking about how we can normalize policy going forward,” Nakaso responded. “The people at the BOJ are equipped with this capacity.”

Richard Smart has been living and writing in Japan since 2002.
The bank has failed to reach its target of 2 percent inflation—by a lot.