The BOJ Should Focus on Equities and Banks, Not Inflation

The Bank of Japan’s policy meeting Thursday and Friday is likely to focus on its inability to spark a sustained rise in the inflation rate despite years of negative interest rates and quantitative easing. That emphasis would be missing the point. The BOJ’s big problem is that its policies have effectively forced Japanese investors out of bonds and into equities, which are now tanking, and that it has not been able to fix the damage done to banks by negative rates. The Topix Index is off 13 percent since the January peak, and Japanese banks have underperformed the broad index by almost 20 percent since the end of 2015.

The good news is that investors are probably wrong in sensing that the BOJ might be shifting into a hawkish mode. That course of action would do more harm than good because it would strengthen the yen, and there wouldn’t be an offsetting benefit.