5 questions about the Bank of Japan’s regime change

The Bank of Japan’s recent regime change has drawn renewed attention to its monetary policy experimentation. First, the BOJ committed to overshooting its 2 percent inflation target. Second, it will control not only the short-term interest rate, but also a longer-term rate. Instead of, as it has done before, committing to purchasing a pre-determined quantity of bonds, the BOJ will buy as many Japanese government bonds (JGBs) as necessary to keep the yield on 10-year JGBs at its current level of around zero percent.

Japan's yield curve

Here’s what we learned about regime change from BOJ Governor Haruhiko Kuroda’s recent visit to the Hutchins Center at Brookings:

Does the recent regime change amount to tapering?

Some in financial markets say the new regime amounts to “tapering”, asserting that by committing to buy a pre-determined amount of JGBs, the BOJ is rolling back its purchases and essentially tightening monetary policy. Mr. Kuroda dismissed this criticism:

How are Japan’s banks faring after all of the BOJ experimentation?

The falling profitability of banks has contributed to markets’ concerns about BOJ policy experimentation, which started with the introduction of negative interest rates in January 2016. Mr. Kuroda acknowledged pressures on banks’ profits but said that negative impact isn’t hurting Japanese economic growth (yet):

Is the Bank of Japan running out of ammunition?

A major concern inside and outside central banks in advanced economies in which short-term interest rates already are near zero is whether they have the tools to fight a recession. Mr. Kuroda said the BOJ believes a minus 0.1 percent short-term rate and a zero percent 10-year JGB rate are currently appropriate, but there’s room for the BOJ to do more if the economy disappoints:

Yields on 10-year government bonds for selected countries

Yields on 10-year government bonds for selected countries

Is the BOJ inviting more expansionary fiscal policy?

Decades of deficit spending by the Japanese government and a slow-growing economy have pushed the ratio of Japanese government debt to GDP to a very high 243% (which is also the highest in the world ratio of public debt to GDP). This has led to concerns about Japan’s long-run fiscal sustainability, and suggestions that fiscal authorities have little room to do more to stimulate the economy. By promising to buy an unlimited quantity of JGBs while keeping the yield on 10-year JGBs from rising, Mr. Kuroda acknowledged that the BOJ is making possible more expansionary fiscal policy. He ruled out, however, helicopter money, which requires cooperation between fiscal and monetary authorities that is not possible under the law that makes the Japanese central bank independent.

What lessons does the BoJ’s experience with unconventional monetary policy teach the rest of the world?

Appearing with Mr. Kuroda, Alan Blinder, a former vice chairman of the Federal Reserve and a visiting scholar at Brookings, said that negative interest rates in Japan and in Europe have done less than he anticipated:

I think what we’ve learned so far…is that negative interest rates are neither as bad as their critics said nor as good as their boosters said…I’ll just admit I thought they would do more than at least they have to date… The other thing that I wonder about a lot, and this is not just Japan … is whether for reasons that are only partially understood central banks are better at bringing inflation down than pushing inflation up. The kinds of things we teach our students don’t really lead you to that conclusion, and it’s just starting to look that way as you look around the world.

Mr. Kuroda offered two lessons from Japan’s experience for the rest of the world—avoid prolonged financial crises and deflation: