Exclusive: Under Government Pressure, BOJ Considering Specific Measures for Easing

By Leika Kihara and Minami Funakoshi

TOKYO – The Bank of Japan (BOJ) is contemplating specific measures to enhance monetary stimulus in response to emerging signs of inflation weakness, according to sources familiar with the central bank’s considerations. Under pressure from the government, the BOJ is looking to align its actions with a significant fiscal spending package announced recently, aiming to maximize the impact on Japan’s economy, which has struggled with prolonged deflation.

The Ministry of Finance is actively advocating for the BOJ to adopt more accommodative policies and has prepared a statement to be released if the central bank decides to ease its stance. A draft statement indicates governmental support for a BOJ decision to ease, highlighting a willingness to implement necessary policy measures alongside the planned stimulus package.

Economy Minister Nobuteru Ishihara has intensified the call for action, expressing hope that the BOJ will strive to meet its inflation target. Recent data reveals that core consumer prices in June experienced their largest annual decline since the BOJ initiated aggressive stimulus efforts in 2013.

Despite this pressure, some BOJ board members may hesitate to support easing measures due to concerns about the rising costs and diminishing effects of an already extensive stimulus program. Many officials within the central bank are wary of their remaining policy options and are cautious about expanding a program that has yet to effectively raise inflation levels.

Analysts believe that the BOJ has limited alternatives and must act, particularly following the announcement of a substantial 28 trillion yen stimulus package by Prime Minister Shinzo Abe. Market expectations for BOJ action have heightened, creating pressure for the central bank to respond.

Experts suggest that although the BOJ may take steps to ease, it is unlikely to meet market expectations for radical measures such as direct central bank financing of governmental debt. Instead, the central bank is expected to rely on its existing framework, which includes negative interest rates and a robust asset-buying program.

Currently, the BOJ purchases approximately 110 to 120 trillion yen in government bonds yearly, aiming to expand its total holdings at a pace of 80 trillion yen annually. However, further increasing bond purchases may pose challenges since the BOJ already holds a significant portion of the government’s bond market.

To surprise the markets, the BOJ might consider a notable increase in bond purchases or expand its investment in riskier assets like exchange-traded funds. Deepening negative interest rates from the current level of minus 0.1 percent is not favored, as the policy has been met with public discontent.

Given BOJ Governor Haruhiko Kuroda’s history of surprising the markets, there’s uncertainty surrounding the central bank’s potential actions. The BOJ is expected to weigh the growth impetus from Abe’s stimulus package, which may make any downward revision of inflation forecasts marginal, complicating the justification for immediate policy changes.

Economist Hiroshi Shiraishi from BNP Paribas has suggested a 60 percent likelihood of easing, noting that the BOJ faces a conundrum. If it fails to take significant action, it may disappoint high expectations, while bold steps could entail considerable future costs and repercussions.

In summary, the BOJ is at a critical juncture, caught between government pressures, market expectations, and its own policy constraints as it navigates the complexities of Japan’s economic landscape.