Photo/Illutration Bank of Japan Governor Kazuo Ueda meets reporters in Tokyo on July 28. (The Asahi Shimbun)

The Bank of Japan decided July 28 to apply greater flexibility to the way it operates its monetary easing measures.

With inflation higher than projected, the BOJ quite rightly wants to be able to respond promptly to changes in the economic situation.

At the same time, the central bank needs to offer a more candid explanation on the increasingly complicated way in which it conducts monetary policy.

Seven years ago, the BOJ added the interest rate on 10-year Japanese government bonds to its list of monetary policy control targets.

Since then, the central bank has continued to purchase large amounts of government bonds in an effort to keep the long-term interest rate retained within a fixed range centered on zero percent.

Under its latest decision, the interest rate will be controlled with greater flexibility, even though the permissible fluctuation range, which was broadened to plus and minus 0.5 percent last December, will remain in place as a “reference.”

The BOJ will permit the long-term interest rate to overstep the upper bound to a certain extent, up to a maximum of 1 percent, if inflation in excess of projections applies upward pressure on the long-term interest rate.

But the central bank stuck to its earlier assessment that achieving a stable inflation target, accompanied by wage increases, is not yet in sight, hence it decided to maintain the framework of its large-scale monetary easing.

“The measure will make our easy money policy more sustainable and help achieve our inflation target,” BOJ Governor Kazuo Ueda told a news conference following the policy meeting.

The policy amendment came against a background of inflation exceeding BOJ projections.

The policy meeting revised the inflation outlook for fiscal 2023 to 2.5 percent, up significantly from 1.8 percent projected in April.

If the long-term interest rate remained strictly capped despite changes in economic activity and prices, that could invite side effects, such as distortions in the bond market and violent swings in the foreign exchange market.

In fact, the yen weakened drastically last year due partly to the obstinate stance the BOJ was taking at the time over the way it controls the long-term interest rate.

The BOJ will be called on to take more flexible measures in its monetary policy when its stable inflation target comes into view. The central bank should end any practices that could pose an obstacle to doing so.

It could be said the latest measure amounted, rightly, to advance preparations to make the market mechanism function fully as intended.

There is, however, an undeniable lack of transparency about the way the permissible fluctuation range will be maintained while the interest rate will be allowed to overstep it.

Under former Governor Haruhiko Kuroda, the BOJ added extension after extension to its monetary policy as the central bank struggled to achieve its price stability target.

The BOJ will likely have even greater discretion in implementing the latest measure of increased flexibility.

“There are two important things (for the BOJ): making policy decisions in a logical manner and explaining the outcomes in plain language,” Ueda said before he was sworn in as governor.

That remark now faces a test of its value as we will see if he will be true to his words.

Attention will be focused in the coming months and years on how the sustainability of inflation will be assessed.

Prices of imported goods are no longer rising as they did before, but households and businesses, which previously assumed that wages and prices hardly ever rise, are beginning to behave differently.

The BOJ should respond appropriately to both upside and downside risks and ensure that prices and economic activity remain stable.

--The Asahi Shimbun, July 29

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