The Bank of Japan (BOJ) decided to implement additional easing measures.
At the moment, the economy is in a moderate state of recovery, and the inflation rate is also turning positive. In this climate, it is questionable whether repetitive easing is appropriate.
The central bank’s move gives the inevitable impression that it was the result of political pressure as politicians have threatened to change the BOJ law. Or was the BOJ unable to resist market expectations?
In its first outlook report of this fiscal year, the BOJ projected a 0.7-percent inflation rate for the next fiscal year. Since February, the BOJ has posted a 1.0-percent inflation target, so it was under pressure to exhibit more determination toward escaping deflation.
The outlook is reviewed every three months. If so, will the central bank pile on more easing measures every three months at least, succumbing to powerful market and political pressures, until it finally reaches its target?
This is turning into an "automatization" of financial easing. As long as the inflation target is not reached, it is obvious speculative motives will escalate.
The more the BOJ hoards assets like bonds as a form of easing, the more its market presence will grow. The dilemma will only grow deeper as investors will sell off their bonds when the BOJ fails to live up to expectations.
At a time when the smallest catalyst can lead to a massive bear market, there is greater risk of the BOJ itself triggering a market crash. If we follow this train of thought, the BOJ has no choice but to continue easing as the market wishes. The central bank is about to find itself between a rock and a hard place.
It is also growing apparent that financial easing is incoherent and limited. Immediately after the BOJ widened its bond-buying plan by a further 10 trillion yen in February, more than 2.5 trillion yen's worth of two-year bonds were released. Nearly 50 percent of those are owned by the BOJ.
If the central bank’s presence becomes too large in a particular market, there will be no sellers. As a result, investors will have no other choice but to buy other assets, and in the case of government bonds, the maturity period will grow longer and longer.
That is tantamount to a long-term support plan for funds acquisition, thereby financially helping the government. In fact, more than 44 trillion yen's worth of long-term bonds will be issued this fiscal year, but the BOJ is due to buy up a similar sum of long-term bonds within this fiscal year.
As long as the BOJ is catering to the demands of the market, the effectiveness of its policy continues to weaken. While the Diet debate over raising the consumption tax rate continues to stall, doubts remain on whether the BOJ is not trying to cover up the fiscal problem.
Even then, the central bank dares not go against the market for fear of stocks being sold in disappointment and being lambasted in the Diet. Is that what the BOJ is thinking?
The more the central bank gets pushed into a corner, the more difficult it will become to change direction. The BOJ must stand fast and adamantly resist excessive pressure to regain policy freedom.
--The Asahi Shimbun, April 29
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