In an unusual critique of its past policies, the Bank of Japan (BOJ) acknowledged that former governor Haruhiko Kuroda’s aggressive monetary stimulus fell short of altering consumer psychology as intended. This marks a symbolic shift away from Kuroda’s decade-long experiment in radical monetary policy.
A review released on Thursday highlighted potential long-term negative effects of Kuroda’s policies, including significant strain on the bond market from the bank’s large-scale quantitative easing. The BOJ warned that these side effects might persist longer and escalate further than initially anticipated.
The findings are likely to strengthen the BOJ’s commitment to gradually normalize monetary policy and move beyond the remnants of that unconventional era.
“There’s greater-than-expected uncertainty regarding how the BOJ’s massive monetary easing influenced public expectations,” said BOJ Governor Kazuo Ueda, who succeeded Kuroda last year. He added, “There are also various side effects, some of which may not yet have emerged.”
Japan’s 25-year struggle with deflation and economic stagnation had led the BOJ to pioneer unconventional measures like zero interest rates and quantitative easing. While other central banks globally adopted similar strategies during crises such as the global financial meltdown and the COVID-19 pandemic, they largely managed to unwind these policies as their economies recovered.
Upon assuming office in April 2023, Ueda initiated a comprehensive review of the BOJ’s unconventional tools used over the past 25 years to combat deflation.
One of the most debated policies was the large-scale asset purchase program introduced in 2013 under Kuroda. This initiative, later combined with negative interest rates and yield curve control, aimed to reshape public inflation expectations.
Under Ueda’s leadership, the BOJ terminated these programs in March and raised short-term interest rates to 0.25% in July, signaling a departure from Kuroda’s approach.
The review critically examined Kuroda’s efforts to use monetary policy as a direct tool to influence public sentiment. His strategy was to instill confidence in inflation through bold measures and a commitment to achieving the 2% target. This marked a departure from the views of Kuroda’s predecessors, who believed that monetary policy alone couldn’t change public perceptions and that broader efforts were necessary to overcome deflation.
The academic and policymaker community remains divided over Kuroda’s policies, with some praising his boldness and others warning of their high costs.
At his farewell press conference in April 2023, Kuroda defended his policies as both effective and “appropriate,” though he expressed regret that the 2% inflation target was not sustainably achieved.
Balancing Perspectives
The BOJ’s review sought to provide a balanced assessment by analyzing which aspects of Kuroda’s policies were effective and which fell short. Using economic models, the review evaluated how the shocks induced by his stimulus influenced inflation expectations.
While the policies did shift public perceptions of price trends to some extent, they failed to accelerate inflation to the 2% target. The review attributed this shortfall to Japan’s deeply entrenched deflationary mindset among firms and households, which made substantial changes in expectations difficult to achieve.
Research also revealed that the BOJ’s large-scale stimulus boosted gross domestic product by an average of 1.3% to 1.8% but contributed only 0.5 to 0.7 percentage points to inflation.
The BOJ hopes this review will help resolve longstanding debates between proponents and critics of Kuroda’s policies. However, some academics argue the review did not sufficiently scrutinize the theoretical foundations of the stimulus.
Hiroshi Yoshikawa, professor emeritus at the University of Tokyo, criticized the review for attributing the failure to Japan’s deflationary mindset rather than questioning the theoretical framework of Kuroda’s policies.
“It’s evident from the data that the BOJ’s massive monetary easing failed to achieve 2% inflation. That’s undeniable,” Yoshikawa said. “The real issue lies in understanding why it failed. My view is that its theoretical foundation was fundamentally flawed.”
