
Following the Monetary Policy Meeting (MPM) held in December 2024, the Bank of Japan released its “Review of Monetary Policy from a Broad Perspective”. This report analyzed and assessed the effects and side effects of the Bank’s unconventional monetary policies over the last 25 years, with the aim of using such information to shape future policy management. At over 200 pages long, it is a massive endeavor, consisting of data compiled from a range of activities in a multilateral review that has been ongoing since Governor Ueda was appointed in April 2023.
What are the BOJ’s unconventional monetary policies?
What traditional monetary policies aim to do is to influence the funding costs of private banks by varying short-term interest rates, and thereby controlling economic and pricing situations. By contrast, the aim of non-traditional monetary policies is to control economic activity and prices by lowering short-term interest rates to zero or negative levels, or by setting indicators other than short-term interest rates as the operating targets.
The specific frameworks involved in non-traditional monetary policies include large-scale purchases of government bonds, purchases of other risky assets, forward guidance (a tool that central banks use to inform the public about the future outlook for short-term interest rates or policy directions), negative interest rate policies, and yield curve control (YCC).
One might say that non-traditional monetary policies across the globe these days had two major forerunners, namely the “zero interest rate policy” and the “policy duration effect” policy implemented in Japan from 1999 to 2000, and “quantitative easing” which was carried out in Japan from 2001 to 2006. The “policy duration effect” policy, which sought to lower long-term interest rates under zero-interest rate constraints to elicit monetary easing effects, is the mechanism of the non-traditional monetary policies that were implemented back when current Governor Ueda was a Policy Board member of the Bank.
These pioneering non-traditional monetary policies that were implemented in Japan failed as policy responses to the bubble economy or soaring real estate prices, and have long been regarded overseas as peculiar and uniquely Japanese policies that were adopted in a context of financial uncertainty. However, in the aftermath of the global financial crisis, such non-traditional monetary policies in fact became the standard policy approach taken by various major economies.
What compelled the world’s major central banks—especially those in Japan, the US, and Europe—to adopt such non-traditional monetary policies was the fact that policy interest rates had fallen to near-zero levels, ultimately leaving little room for any additional easing.
Non-traditional easing failed to have the desired effect
The “Review of Monetary Policy from a Broad Perspective” contained a detailed empirical analysis of the effects of the Bank’s non-traditional monetary policies. Yet by comparison, one also gets the sense that the Bank barely ventured to make an empirical study of its policies’ side effects. I also think that it should have made a deeper analysis of the reasons that large-scale monetary easing failed to have as much of an effect as was initially envisioned.
Moreover, the Review also concluded that “While (non-traditional monetary policies) have had some side effects on the market or on financial institutions’ profits, at present, they would seem in an overall sense to have had a positive effect on the Japanese economy”, but I think it would actually be quite difficult to accurately measure and compare the magnitudes of the effects and side effects of its non-traditional monetary policies, and to judge their comprehensive impacts.
When it comes to non-traditional monetary policies, not much knowledge has been accumulated on their effects and side effects over a long period, as there has been in the case of traditional monetary policies. This is partly also because the side effects elicited by non-traditional monetary policies—for example, distorting the financial market, reducing fiscal discipline, impairing the profits of financial institutions, deteriorating the BOJ’s financial environment, etc.—only materialize after quite some time has passed.
Understanding the limits of monetary policy
We do know that ever since the late 1990s, when the inflation rate fell substantially and short-term interest rates dropped down to near-zero levels, the Bank of Japan’s non-traditional monetary policies had reached their limit. However, the problem that conceivably gave birth to such an economic and financial environment is that Japan’s economic potential declined, namely in the form of its productivity growth rate and potential growth rate. That’s a problem which essentially cannot be solved through monetary policy.
Instead of sticking with non-traditional monetary policies at such scale and for so long that had the potential to produce significant side effects into the future, I think the Bank of Japan should have sought to encourage efforts by private enterprises and their workers to improve labor productivity, and to prioritize the government’s growth strategies. I also wish that the “Review of Monetary Policy from a Broad Perspective” had assessed the limits of these monetary policies and examined the effects of the government’s economic measures, for example.
Applying the results to future non-traditional monetary policy
Incidentally, the main section of the “Review of Monetary Policy from a Broad Perspective” consists of two parts: “1. Economic Activity, Prices, and Monetary Policy over the Past 25 Years and the Conduct of Monetary Policy”, and “2. Implications for the Conduct of Monetary Policy”. This approach—which goes beyond a study of the past to apply the data to future policy—is explicitly laid out in the report’s structure.
Back in March 2024 when the Bank of Japan eliminated its negative interest rate policy, it declared that it was returning its main policy measures to controlling short-term interest rates, which is to say, to more traditional policy methods. This amounted to a sudden breakaway from its non-traditional monetary policies. This drastic decision by the Bank could very well reflect Governor Ueda’s desire to bring a quick end to the BOJ’s non-traditional monetary policies, given the significant uncertainty over their side effects.
The uptick we are now seeing in the growth rate of prices and wages seemingly has much to do with the temporary rise in import prices, which is attributable to an upturn in prices in overseas markets and the depreciation of the yen, and this is different from the kind of sustained rise built on strong domestic demand. Going forward, if there is a downturn in overseas economic activity, a rapid appreciation of the yen, or some other such change in the external environment, the BOJ might be forced to switch back to monetary easing once again.
However, given how little room there is now for short-term interest rates to come down, in that scenario, it’s also conceivable that the BOJ will be compelled to adopt non-traditional monetary policies once more.
Buying up more JGB’s again also an option
That said, in case it should become necessary to roll out non-traditional monetary policies again in the future, the BOJ needs to make an analysis at this time of what specific measures it should readopt and how it should go about conducting them, and in turn what effects they can be expected to have and whether the side effects can be fully controlled. This may have been a significant purpose for the BOJ in carrying out its “Review of Monetary Policy from a Broad Perspective”.
I would think there is little chance that the BOJ will reintroduce its negative interest rate policy, yield curve control (YCC), its purchases of exchange traded funds (ETFs), or other such measures that bring significant side effects. If these non-traditional monetary policies did need to be brought back, the BOJ might well choose to do this by no longer scaling back its JGB purchases and reducing their amount outstanding on its balance sheet (as it began doing in July 2024), which is to say, by halting its quantitative tightening (QT), and opting instead to increase its JGB purchases once again.
As for the Bank’s JGB purchases, while the “Review of Monetary Policy from a Broad Perspective” does point out that “Going forward, it should be noted that the negative effects could become more significant—for example, the functioning of the JGB market might not recover much from its decreased state, or the side effects might appear later on”, the BOJ will likely operate with caution, while giving sufficient consideration to such side effects. And even if it does reintroduce its JGB purchasing scheme, perhaps this time it can mitigate to some extent the risk of decreased functionality in the bond market by choosing not to implement YCC simultaneously.
Profile
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Takahide KiuchiPortraits of Takahide Kiuchi
Executive Economist
Takahide Kiuchi started his career as an economist in 1987, as he joined Nomura Research Institute. His first assignment was research and forecast of Japanese economy. In 1990, he joined Nomura Research Institute Deutschland as an economist of German and European economy. In 1996, he started covering US economy in New York Office. He transferred to Nomura Securities in 2004, and four years later, he was assigned to Head of Economic Research Department and Chief Economist in 2007. He was in charge of Japanese Economy in Global Research Team. In 2012, He was nominated by Cabinet and approved by Diet as Member of the Policy Board, the committee of the highest decision making in Bank of Japan. He implemented decisions on the Bank’s important policies and operations including monetary policy for five years.
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