BOJ Under Surveillance

Today’s Policy Board meeting must have been among the most difficult in the Bank of Japan’s long history. In a joint statement of the government and the BoJ released after the meeting, it was announced that the supervision of macroeconomic policy including monetary policy was transferred to the Council on Economic and Fiscal Policy.

This is an 11-member government body, which includes some ministers handling economic and fiscal policies, BoJ Governor Masaaki Shirakawa, business leaders and academics. After having been dormant during the DPJ governments, it has recently been revived by Prime Minister Shinto Abe. This effectively ends the independence of Bank of Japan.

The government also forced upon the BoJ a new 2% inflation target, which replaces the 1% inflation goal. Back in June, before the Bank’s price stability goal had become an issue in the election campaign, BoJ governor Shirakawa had clearly rejected the setting of the inflation target so high. He argued that “simply announcing out of the blue that the Bank aims to achieve 2 percent inflation is not enough.”

He warned that if the market would take the objective seriously, there was a risk of a premature rise in long-term yields. This would cause a fall in prices of Japanese government securities and losses for financial institutions, which would impair their lending capacity. Nevertheless, Mr. Shirakawa voted in favour of the new inflation objective. Only Mr. Sato and Mr. Kiuchi voted against.

The Bank unanimously decided to adopt the open-ended asset purchasing method. From 2014, the BoJ will buy every month about JPY 13 trillion (i.e. 2.7% of GDP) in long-term JGBs (JPY 2 trillion) and T-bills. However, factoring in redemptions, the ultimate result will be that the balance of the Asset Purchase Programme will increase by about JPY 10 trillion over the course of 2014.

During the meeting, the BoJ did not announce an increase in the pace of asset purchases before next year. That was a bit of a surprise, as the Policy Board Members also left the inflation projection virtually unchanged at 0.9% on average in FY2014, which is now well below the new price stability target.

By Raymond VAN DER PUTTEN

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