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Home > Media Reviews > News Review Last Updated: 14:54 03/09/2007
News Review #347: May 18, 2006

Uncertainty over Bank of Japan's Monetary Policy

Reviewed by Hitoshi URABE

Uncertainty over Bank of Japan's Monetary Policy
(David Pilling) Financial Times


After five years continuing an unusual policy for a central bank to adopt - dubbed quantitative easing policy, the Bank of Japan changed the method to control Japan's money in March. The central bank announced that it would terminate the quantitative easing, and switch to orthodox and conventional means of monetary control, primarily based on interest rate. The market accepted the switch calmly, as most of the players were already prepared for the change, and the extra cash has been steadily pulled out of the system in transition to the new policy.

But now the market participants are becoming wary, as, although the quantitative easing has ended, BOJ has not made its new policy guidelines sufficiently clear. The article introduced above explains this frustration among the players.

When the termination of the quantitative easing was announced, what was described as "the mid and long term price stabilization understanding" was revealed, with the rate of inflation in the range of zero to two percent p.a. The range was explained as the inflation rate broadly shared among the nine board members of BOJ to be generally appropriate. BOJ governor Mr Fukui from the outset stressed that the number is not a "target" or "reference" but merely an "understanding" - of the feelings of the board members.

The ambiguity of the terminology, however, is now beginning to play its role by obscuring the policy of the central bank. On one hand, it has provided BOJ with a free hand, to play its card in any way it wishes, so long as it could be explained as in accordance with the "understanding" whatever that really is. It means it would allow BOJ to act swiftly and effectively in realizing its policy objectives. In fact, Mr Fukui himself has acknowledged the situation being ambiguous earlier this week by saying, "We have shifted from a commitment regime in which policy was linked to the consumer price index to a more flexible policy,"

But while the current setup seems comfortable for the central banker, market participants, in a broad sense of the term, are beginning to get frustrated. As the central bank's policy is effectively hidden, it is virtually impossible to formulate effective and viable finance plans. One possible effect would be the inclusion of the central bank's policy as a risk factor into the cost of money, i.e. adding a risk margin to drive the interest rates disproportionately higher than intended.

Policies, including monetary policies of the central bank, could and should be revised when deemed appropriate. In order to pursue its policy objectives, and the revisions thereof, BOJ is provided with a certain level of autonomy - independence from the government, and the board of governors for guidance. But this does not mean BOJ is free from scrutiny by the people, and it does not provide any justification for hiding the monetary policy of the central bank.

Some people are even beginning to suspect that the lack of explanation from BOJ on its monetary policy is because it has no policy to begin with. That is awful indeed, but the current situation is in effect no different from that awful possibility.

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