Policy Review Highlights Mechanisms and Challenges of Quantitative Easing – Reuters

By Stanley White

YOKOHAMA, Japan – Bank of Japan Deputy Governor Kikuo Iwata stated on Thursday that the comprehensive review of the central bank’s policies scheduled for next month will concentrate on the monetary transmission mechanism and the challenges faced in implementing its stimulus plan effectively.

Iwata emphasized that the review is not intended to signal a particular direction for future monetary policy.

He reiterated the BOJ’s willingness to ease policy further if necessary; however, the significant sell-off in government bonds seen earlier in the week has raised concerns among investors regarding the potential scaling back of the BOJ’s quantitative and qualitative easing (QQE) program, which includes purchases of government bonds and riskier assets.

"There is no doubt that our policy has played a key role in extracting Japan from deflation, yet we have still not achieved our 2 percent inflation target," Iwata remarked in a speech aimed at finance and business community members. "Given this situation, I wish to review the transmission mechanism and various impediments to our policy."

The BOJ disappointed market expectations during a recent policy meeting by not increasing government debt purchases or lowering the already negative interest rates, thereby reinforcing the perception that it is running low on options to address nearly two decades of deflationary trends. The central bank has committed to publishing a comprehensive review of its monetary policy at its upcoming meeting in September, which has contributed to increased policy uncertainty and prompted investors to offload bonds.

In addition, the government recently finalized a fiscal spending package exceeding 28 trillion yen to stimulate economic growth, which some economists argue adds pressure on the BOJ to maintain monetary policy that supports government spending.

Iwata clarified that the combination of fiscal spending with the BOJ’s QQE easing should not be confused with "helicopter money" or the monetization of government debt.