BOJ’s Comprehensive Policy Review Has a Lot to Take in: Primer

BOJ to Conduct Comprehensive Review of Policies

Haruhiko Kuroda became Bank of Japan governor in 2013 vowing to beat inflation and drag the economy out of its malaise. More than three years later, this hasn’t happened, and last week he ordered his staff to conduct a comprehensive review of the BOJ’s policies to see what is needed to meet its 2 percent price target.

As the chart indicates, Kuroda is the latest in a long list of governors to use "unconventional" monetary policies to try to drag Japan out of its funk since the bursting of an asset-price bubble in the early 1990s. An earlier attempt with quantitative easing (marked in pink) began during Masaru Hayami’s term, followed by other experiments until Kuroda arrived on the scene (marked in yellow).

To understand what could change after the review, which is due to be completed for the next board meeting on Sept. 20-21, below is a rundown of the many and varied policies already being pursued by the BOJ.

Kuroda emphasized this week that he doesn’t see policy shrinking after the review and that his purpose is to find a way to hit 2 percent inflation.

1. Quantitative and qualitative easing

Tool (purchases)

Targeted Annual IncreaseTargeted holdingCurrent size of holdings
Expand the monetary base80 trillion yen403.9 trillion yen
Government bonds and other securities80 trillion yen386.7 trillion yen
Exchange-traded funds6 trillion yen8.7 trillion yen
Real-estate investment trusts90 billion yen0.3 trillion yen
Commercial paper2.2 trillion yen2.3 trillion yen
Corporate bonds3.2 trillion yen3.2 trillion yen

The BOJ’s bond purchases didn’t start with Kuroda and are a continuation of previous policies. The scale of the buying changed under Kuroda, who combined various different programs and doubled the size of bond purchases at his first meeting as governor.

The negative interest rate

The bank imposed a negative interest rate from February on some of the money that financial institutions park at the BOJ. Within a three-tier system covering funds deposited at the central bank, the category known as the policy-rate balance attracts a negative rate of 0.1 percent. In the month through July 15, this applied to about 25.7 trillion yen.

Source: Bank of Japan

Since it was announced, the negative rate has driven down borrowing costs across the economy, cutting into commercial bank profits and pushed bond yields below zero. The policy is meant to stimulate lending and demand for loans, without overly damaging profitability at banks, but it has been met with a very negative reaction, including criticism from the head of Japan’s banking association.

In addition, the bank has a number of lending programs that started under Kuroda’s predecessor, Masaaki Shirakawa. One of these, a dollar-lending scheme, was doubled to $24 billion last month and a new program to lend government securities to financial institutions was also announced.

NameLimitAmount lent
Fund-Provisioning Measure to Stimulate Bank LendingUnlimited25.5 trillion yen
Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth11 trillion yen6 trillion yen
U.S. Dollar Funds-Supplying Operations Against Pooled Collateral$24 billion$12 billion
BOJ lending of Japanese government securities None so far
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