Analysis-BOJ bids final farewell to key policy tests Kuroda By Reuters

It’s Leika Kihara

TOKYO (Reuters) – In a frequent criticism of its previous policies, the Bank of Japan said former governor Haruhiko Kuroda’s policies had not changed consumer sentiment as much as he had hoped, continuing a symbolic shift away from his decade-long policy.

The commentary, which was released on Thursday, also warned that the negative effects of Kuroda’s monetary stimulus – such as a severe banking crisis that is sold in the market – could last longer than expected and grow in the future.

The findings of the analysis will strengthen the BOJ’s determination to tighten the monetary policy and eliminate the remaining imbalances of the period.

“What I can say is that there is greater uncertainty than expected in whether the BOJ’s monetary easing will have what people expect,” BOJ chief Kazuo Ueda, who replaced Kuroda as governor last year, told a press conference on Thursday. he asked about the policies of his predecessors.

“There are other problems, some that may not have been apparent,” he said.

Japan’s 25 years of recession and poor economic performance forced the BOJ to pioneer unconventional policies such as zero interest rates and quantitative easing.

Other central banks around the world later did the same during major crises such as the global financial crisis and the COVID-19 pandemic, but they may end them quickly when their economies recover.

After taking office in April last year, Ueda launched the program to explore the advantages and disadvantages of various disused tools used during the 25 years of the banking war and deflation.

The most controversial policy came in 2013 when, under Kuroda, the BOJ launched a massive asset purchase program that later combined zero interest rates with yield controls.

Under Ueda, the central bank ended the program in March and raised the long-term interest rate to 0.25% in July.

The policy review was the first attempt by the BOJ to focus on something very different from the Kuroda experiment, which was directly affecting public opinion and monetary policy.

The idea was that by combining a promise to do whatever it could to support inflation with a more aggressive rate cut, the BOJ could surprise the public with its low interest rates and change the public’s view of future rate movements.

It was a change from those who preceded Kuroda that the monetary policy had little power to influence public opinion, and only through the actions of the government and small groups that Japan could get out of deflation.

Academics and former policymakers in Japan were divided between those who praised Kuroda’s approach and others who were wary of the high cost of his experiment.

At his farewell meeting in April 2023, Kuroda explained that untimely monetary easing was appropriate and “appropriate” but said it was “regrettable” that Japan had not met the BOJ’s 2% inflation target.

IN THE MIDDLE

In order to show the right attitude, the BOJ’s evaluation conducted an academic study of which of Kuroda’s policies worked well and which did not.

The bank used economic models to analyze how shocks caused by Kuroda’s stimulus had affected inflation expectations.

The results showed that while the stimulus had some effect on changing public opinion about future rate movements, it was not enough to accelerate inflation to the BOJ’s 2% target.

Japan’s prolonged recession created a deep-seated belief among firms and households that wages and prices would not rise going forward, which was difficult to reverse, the analysis concluded.

Another study showed that while the BOJ’s big stimulus raised gross domestic product by 1.3% to 1.8% on average, it raised inflation by 0.5 to 0.7 percent.

BOJ officials hope that the review will help end the bitter battle between fans and opponents of Kuroda’s policies. But some analysts who commented on the review are not convinced that the BOJ has given the problems of previous proposals sufficient scrutiny.

Hiroshi Yoshikawa, a professor emeritus at the University of Tokyo, criticized the commentary for criticizing Japan’s deflationary mindset, rather than questioning Kuroda’s theory, explaining why inflation failed to hit 2%.

“It is clear from the data that the BOJ’s significant reduction in funds failed to achieve 2% inflation. No one can deny that truth. The main problem is why it failed to do so,” he said. “My opinion is that his thought process … was fundamentally flawed.”