Photo/Illutration Bank of Japan Governor Haruhiko Kuroda responds to questions at a June 17 news conference. (Pool)

The Bank of Japan formally decided June 17 to continue its policy of aggressive monetary expansion even as many other central banks are raising interest rates. In the meantime, the yen has nosedived against other major currencies because Japan’s stock market has been on a weak footing in recent weeks.

The question confronting the BOJ is whether maintaining its super-loose monetary policy will help keep the domestic economy on an even keel. The bank ought to quickly re-examine the effectiveness of its policy and take appropriate action. This perhaps should include a review of the guidelines for its policy operations in coming weeks.

Inflation in the United States is running at its fastest pace in around 40 years, which forced the Federal Reserve to quickly raise interest rates. The European Central Bank has signaled it will raise interest rates in July for the first time in 11 years. The gap between extremely low interest rates in Japan and the rising costs of borrowing in other industrial nations has exerted strong downward pressure on the yen, and this situation is likely to continue widening for a while.

A weaker yen bolsters the profits of Japanese exporters but places a financial strain on households and importers by pushing up prices of imported products.

The steep 20-yen decline in the value of the Japanese currency against the greenback over the past three months or so has added to uncertainties felt by households about the future and created considerable anxiety in terms of corporate business planning. The negative impact of the yen’s rapid fall cannot be overlooked.

In a statement issued June 17, the BOJ said, “it is necessary to pay due attention to developments in financial and foreign exchange markets.” The central bank’s monetary policy is not aimed at controlling exchange rates. But it is, nevertheless, necessary for the bank to confront the fact that its strict policy of keeping long-term rates to around zero is causing repercussions in currency markets.

In 2018, the BOJ introduced credit policy guidelines which stated that the bank would “maintain the current extremely low levels of short- and long-term interest rates for an extended period.” In autumn 2019, the bank adjusted this approach by saying it “expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary.” This policy principle is still in effect, partly to cushion the economic impact of the COVID-19 pandemic.

It is time for the bank to respond to the radical changes in the global economic landscape over the past few years by rethinking this approach.

We urge the BOJ to evaluate and explain carefully the effects of the yen’s downturn as well as the speed of changes in exchange markets.

In January, the BOJ said a cheaper yen has a positive overall effect on Japan’s real gross domestic product, citing an estimation based on economic data until 2019. But the time has come for it to make a fresh estimation to determine whether that is still the case and present its conclusion to the public.

Japan’s consumer inflation rate is still significantly lower than that in Western industrial nations. The BOJ believes the inflationary effects of sharply higher energy and food prices in international markets will start waning before long. Given the tepid economic and wage growth in Japan, we fully understand the need for easy monetary policy to prop up the economy.

But if the inflation rate remains well above the central bank’s target of 2 percent per annum for an extended period, for whatever reason, the economy will take a significant hit.

The BOJ needs to keep a close watch on price trends, learning from the failure of major Western central banks to foresee the rapid rise in inflation.

In a situation that seriously complicates the BOJ’s task, it is all the more important for the bank to explain carefully the objectives and expected effects of its policy.

BOJ Governor Haruhiko Kuroda was forced to retract his assertion that Japanese households have increased their tolerance for rising prices after the remark, made in a speech, was roundly criticized. Kuroda must make sure he does not do anything again that could undermine the credibility of the central bank at this delicate moment.

--The Asahi Shimbun, June 19