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Analysis: BOJ faces communication dilemma as weak inflation leaves Kuroda with complex policy

Leika Kihara
·3-min read
FILE PHOTO: A man wearing a protective mask walks past the headquarters of the Bank of Japan in Tokyo

By Leika Kihara

TOKYO (Reuters) - Eight years of stimulus attempts to spur weak inflation have left the Bank of Japan with one of the most complex monetary policy frameworks in the world, heightening communication challenges for Governor Haruhiko Kuroda, who was once known for his bold, simple messages.

And yet, the BOJ lacks a strategy for changing public perceptions on future prices, beyond clinging to a commitment on money printing that had so far failed to prop up inflation.

The BOJ's struggle highlights the challenge global central banks face in telegraphing their policy intentions to financial markets after their mandates broadened during the COVID-19 pandemic. The wall of money they and many governments are pumping in is making future inflation trends, and potential policy responses, even harder to predict.

"The BOJ is paying the price for sticking to a policy that didn't work," said former BOJ executive Kazuo Momma, who is currently an economist at Mizuho Research & Technologies.

"There's not much more the BOJ can do to accelerate inflation to 2% and yet, it's clinging to the target and trying to justify the current policy. That's creating flaws that are hard to address unless it overhauls the policy altogether."

When he deployed his "bazooka" stimulus in 2013, Kuroda's strategy to defeat deflation was clear: use simple communication to convince consumers that prices won't fall forever and coax them to start spending again. He did just that, pledging to hit 2% inflation in two years by doubling the pace of money printing.

"Laying out a commitment is very important for monetary policy," Kuroda told reporters, flicking a poster board with letters saying "2% in 2 years with 2 times more money."

"It's also critical to communicate the commitment in an easy-to-understand way to change public perceptions," he said.

Since then, core consumer inflation never reached 2% when excluding the effect of a sales tax hike in 2014. Most recently, prices have fallen for seven straight months through February.

Two years left in his term, Kuroda no longer speaks of his resolve to hit 2% inflation quickly, and instead says it is still "possible" to meet the goal by patiently sustaining the current stimulus.

The BOJ ditched shock therapy in 2016 and reverted to a policy targeting interest rates. That has left Kuroda with a policy combining two interest rate targets, a variety of risky asset purchases, a pandemic-relief loan scheme and several commitments tied to different goals.

The rising side-effects of prolonged easing also forced the BOJ to nuance its message and remove clear targets. Kuroda now says any further easing must take into account the hit to Japan's banking system from already low rates.

Nodding to criticism that its huge presence was distorting markets, the BOJ took out in March a target on the pace of risky asset buying and loosened its control on long-term yields.

The BOJ's focus has shifted to making his stimulus plan sustainable, in hope that keeping borrowing costs low long enough would spur growth and eventually prop up inflation.

The passive approach stands in contrast to Kuroda's pledge in 2013 to deploy "all available tools in a single blow" to eradicate Japan's deflationary mindset.

The BOJ's sole tool directly aimed at affecting public sentiment is a commitment to keep pumping more money into the economy until inflation "stably" exceeds 2%.

But critics say the promise would have little effect in Japan, as inflation is nowhere near that level and markets expect rates to stay low for years to come.

The public no longer seems to care. Only 18% of households knew about the 2% inflation target, the BOJ's quarterly survey for March showed, down from 37% in September 2013.

Nearly 60% said they have never heard about the BOJ's current policy, named "quantitative and qualitative monetary easing with yield curve control."

"What has become clear is the difficulty of affecting Japan's sticky inflation expectations," a source familiar with the BOJ's thinking said. "You can't fire a bazooka twice."

(Reporting by Leika Kihara; Editing by Kim Coghill)