Kuroda Hints at Shift in Thinking on Monetary Policy's Power

What Negative Rates Mean for Japan’s Economy
  • Bank of Japan has recently added negative rate to its arsenal
  • Rapid expansion in the monetary base hasn't spurred inflation

Almost three years after taking the helm at Japan’s central bank, Governor Haruhiko Kuroda has hinted that his view on the power of monetary policy has shifted, after an unprecedented stimulus program failed to achieve his inflation target.

QuickTake Negative Interest Rates

“It’s not that the monetary base alone will pull up inflation or inflation expectations promptly,” Kuroda said in parliament on Tuesday. “We aim to raise prices through an increase in inflation expectations and a tighter gap in supply and demand under QQE,” he said, referring to qualitative and quantitative easing measures.

The remarks contrast with the optimism Kuroda showed as he began his record monetary stimulus program in April 2013, when he made a monetary-base expansion target the centerpiece of his strategy. Three years ago he said this tool was “the most appropriate” way to reach the 2 percent inflation goal and that "monetary policy alone” could achieve this.

“Kuroda has no choice but to admit expanding the monetary base can’t achieve the price target after adopting the negative rate policy to spur inflation,” said Toru Suehiro, a senior market economist at Mizuho Securities Co. “His comments support the growing view that the BOJ will target interest rates after reaching the limit of bond purchases.”

While Kuroda this month repeated that monetary policy alone can achieve the price target -- regardless of the government’s progress in strengthening the economy -- he has added a negative interest rate policy to his monetary arsenal.

Held Accountable

Deputy BOJ Governor Kikuo Iwata, sitting next to Kuroda during the parliamentary session, advocated the monetary base target three years ago. Iwata said Tuesday that central bankers should be accountable if they don’t achieve their targets and should resign if they can’t justify the reasons.

Kuroda has more than doubled Japan’s monetary base in three years, yet consumer prices, excluding fresh food, rose only 0.1 percent in December and have hovered around zero percent since May.

He has had to bolster the monetary program twice in a bid to end Japan’s deflationary mindset. On Tuesday, he pledged to continue his stimulus program until attaining the 2 percent target.

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