EDITORIAL: It’s time to rethink the BOJ’s long-term monetary policy

The global economic landscape is undergoing drastic changes triggered by a global surge in inflation.

Economic policymakers must not let outdated views prevent them from providing timely responses to these challenges. They need to keep their eye on the ball and be ready to act with agility and flexibility at all times.

On September 21, the US Federal Reserve raised interest rates by three-quarters of a percentage point, three times the usual hike, for the third time in a row. Earlier this month, the European Central Bank also raised its benchmark interest rate by 0.75 percentage points.

These strong policy actions indicate that US and European central banks are determined to eliminate historically high rates of inflation, even at the risk of an economic slowdown.

On the other hand, the Bank of Japan, during its policy meeting on September 22, decided to maintain its positions super loose political stance. While energy and food prices are also rising in Japan, underlying consumer price inflation rates, excluding volatile fresh food, have remained within the 2% range, much lower than the figures for the United States or Europe, where prices are rising at annual rates. more than 8 percent. Wage growth also remains sluggish in Japan.

The BOJ is betting that inflation rates are “almost certain to fall below 2%” in the next fiscal year as energy prices peak, as Governor Haruhiko Kuroda put it. This view underpins the Japanese central bank’s policy of maintaining its ultra-accommodative monetary policy. With most private sector economists agreeing with the BOJ’s prognosis, the bank’s policy stance is reasonable for now.

The catch is that the structure of the global economy has changed dramatically due to the pandemic and Russia’s invasion of Ukraine. Uncertainty surrounding the global economic outlook has increased sharply.

There is a good chance that global inflationary pressures will increase or persist, depending on the future development of the US and European economies and Russia’s decisions in the months ahead. Japanese policymakers have no right to be complacent. The BOJ must learn from the costly mistake made by the Fed, which misinterpreted inflation as a temporary phenomenon.

The accelerating weakening of the yen due to differences in monetary policy stance between the West and Japan is helping to push up prices in the country.

On September 22, the government and the BOJ entered the currency market to support the falling yen by selling dollars against the Japanese currency. This was the first such intervention on the market in 24 years. The action will put some pressure on currency speculators betting on the continued decline of the yen. But its effects will be limited as the interest rate differential between Japan and the United States continues to widen.

Setting guidelines for future market operations to control the cost of borrowing at the September 22 policy meeting, the BOJ decided to keep long-term and short-term interest rates at current levels (around of zero). Kuroda said he sees no need to change this position at this time.

With inflation rising at rates above the BOJ’s 2% target due to the unpredictability of the economic climate, the BOJ’s policy for further easing is not consistent with the overall economic situation. Now is the time for the central bank to rethink its guidelines for market operations.

The BOJ has long feared that any sign of a change in its extremely accommodative monetary policy could cause the yen to appreciate.

Now, however, the BOJ itself has said that a sharp drop in the yen is undesirable. It should start discussing measures to respond to the changing situation, including a more flexible approach to monetary accommodation.

How to ensure price stability with wage growth in the current global economic turmoil is a key monetary policy challenge that will test the BOJ’s central banking prowess.

–The Asahi Shimbun, September 24

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