TOKYO – The recent commitment by the US Federal Reserve to keep interest rates low despite creeping inflation has created new headaches for the Bank of Japan, which is quietly trying to divert the economy from its massive stimulus.
In August, the Fed reformulated its targets amid the pandemic recovery, allowing consumer prices to rise faster than the US central bank would have tolerated in previous cycles.
While the BOJ, a pioneer of quantitative easing, has maintained an extremely accommodative setup for decades, its operations are still largely guided by how Fed policy affects global interest rates.
Concerned that a dovish Fed could compromise Japan’s own efforts to keep market rates close to zero, the BOJ at its March policy meeting sought to match the United States’ commitment to do just that.
For BOJ policy makers, that meant breathing new life into its elusive 2% inflation target, making it harder to walk away from past commitments to maintain massive stimulus.
The move highlights the enormous influence Fed decisions have on BOJ communication, as Japanese policymakers feel the need to stay in line with global monetary policy trends shaped by the world’s most powerful central bank. world, say sources familiar with his thinking.
“It was something the BOJ had to clear up after what the Fed did,” said one of the sources, an opinion shared by another source.
“The BOJ commitment has become more binding and more difficult to remove,” said a second source. The sources spoke on condition of anonymity due to the sensitivity of the matter.
That moderate signal comes at an awkward time.
While the BOJ needs to maintain enough support to help the economy weather the pandemic, it also faces pressure to shed an unpopular negative interest rate policy that has hurt financial institutions’ profits.
In response to criticism that its huge buyout was distorting market prices, the BOJ has also been “stealthily reducing” its purchases of government bonds and risk assets.
But the Fed’s emphasis on keeping interest rates close to zero and tolerating above-target inflation for years is dashing the BOJ’s hopes of phasing out a commitment to keep pumping money until inflation “stably rises above” the 2nd. %.
By emphasizing a commitment identical to that of the Fed, the BOJ may find it more difficult to curb money printing even as the economy emerges from the pandemic, suggesting that it will lag far behind its counterparts in ending the policies. in crisis mode.
The Fed’s new average inflation target, unveiled in August, would make US authorities tolerate inflation above 2% for years before raising current interest rates close to zero.
The BOJ has had a similar but more flexible and mostly symbolic commitment since 2016, committing to continue expanding the amount of cash circulating in the economy until inflation stably exceeds 2%.
Unlike the Fed, the BOJ does not tie the commitment to interest rates. To avoid a binding future policy, the language remains vague, with no reference to the pace of asset purchases or for how long inflation should exceed the target.
That flexibility had allowed the BOJ to distance itself from the goal amid growing doubts about whether it could be achieved.
But the Fed’s explicit shift to an average inflation target has now forced the BOJ to give more weight to its own commitment, a setback for the BOJ’s efforts to roll back Governor Haruhiko Kuroda’s “bazooka” stimulus that had failed to fire. inflation.
A month after the Fed’s August decision, Kuroda said the BOJ’s commitment was consistent with the Fed’s thinking on inflation targeting, suggesting that the BOJ’s promise already incorporated key elements of the Fed’s new strategy.
Confirming the alignment, the BOJ this week released detailed analysis on how mimicking the Fed’s strategy would help it reach its target price faster.
The analysis estimated that compensating for two to five years of past weak inflation could be more effective, suggesting that Japan will not see an exit from ultra-easy policy for years, even after inflation picks up.
That would come as a little surprise to market players who already expect the policy to remain very flexible for years to come.
But it could also force the BOJ to maintain a commitment that many analysts consider has little effect on changing public perception of prices.
“What has become clear is that it is impossible to control something like inflation expectations, which are difficult to measure,” said Miyako Suda, an academic who served as a board member of the BOJ for a decade until 2011.
“The BOJ must offer a more candid assessment of why its huge stimulus package did not work as expected.” (Reporting by Leika Kihara; Editing by Sam Holmes)