Great Gamble of the Bank

The chairman stressed “double” and “two percent” in “two years.” The Bank of Japan decided on Thursday to apply new monetary policy based on both quality and quantity. The bank is going to supply $2.8 trillions of money in next two years, swollen from $1.4 trillions of current level. It will do that mainly by buying national bonds. The chairman, Haruhiko Kuroda, expects to raise commodity price by 2 % by the end of FY 2014. In spite of boldness of new policy, economists call it gambling.

This policy should be recognized as an all-out measure for fighting deflation. To make sure of buying necessary amount of national bonds, it temporary abolished “rule of BoJ bills,” which prohibits possessing long-term national bonds beyond the amount of money traded in market. With this policy, the amount of BoJ’s monthly purchase of national bonds will be $73 billions, occupying about seventy percent of monthly flotation of the bond.

By the monetary easing, BoJ expects more liquidation of high-risk assets and positive attitude in lending money. It also predicts a psychological change of consumers to buy commodities before the price gets high. To that bold attempt, market responded favorably. Stock price in Japan Stock Exchange rallied and yen declined against US dollar, and interest of long-term debt declined steeply on Thursday and Friday morning.

Economists in Japan, however, expressed their various skepticisms. Firstly, the huge amount of money supply may cause asset bubble. The policy has little effect to the people who don’t own assets like stocks and real estates. If the bubble bursts, it affects not only to asset owners, but also to the people who do not. In addition, cheap yen leads to high price of resources, which worsens firm and family financial balance.

Secondly, if the government of Japan fails to improve financial situation, the credibility of currency will be lost, because market will recognize BoJ as helping the government by buying national bond. The success of the policy depends on how the government can make its finance healthy.

Thirdly, there is no clear “exit strategy.” When the economy entered into recovery process, then, the bank needs to consider squeezing money supply. If the bank is hasted in selling national bonds, higher risk of price down of national bonds will be emerging. It may remind of European financial crisis, in which banks held a large amount of debts.

A key to success is BoJ’s ability of dialogue with market, politics and people. Kuroda is making so far so good job, because the policy still has certain credibility, helped by uncertainty to the future. When skepticisms spread, real value of the policy will be determined.