Former Bank of Japan member Sayuri Shirai fondly remembers when the bank decided on a massive programme intended to perk up the world's number-three economy and save it from damaging deflation. "It was a very exciting time," recalls the 55-year-old. "Globally a lot of people praised this massive monetary easing, the market reacted positively, so I think I was really lucky. It was a really good experience."
It was 2013. New Governor Haruhiko Kuroda was blowing fresh air into a stuffy institution, and there was a sense of optimism that his "Bazooka" approach to monetary policy might finally help Japan beat crippling deflation. Deflation - or falling prices - is dangerous for an economy as consumers defer purchases hoping goods will become cheaper. This harms consumption and therefore stifles growth.
Backed by Prime Minister Shinzo Abe and his "Abenomics" policy, Kuroda injected first between 60-70 trillion, then 80 trillion yen ($714 billion) a year into the Japanese economy by buying government bonds and other assets, including corporate bonds. The idea was to flood the banking system with easy cash, in the hope that banks would pass on loans at cheap rates to consumers, encouraging them to spend and boost the economy.
"We got certain results. We achieved yen depreciation and higher corporate profits," says Shirai. "Whether it is sustainable or not is another issue." Indeed, five years later, the BOJ appears to have painted itself into a corner.
Inflation has stubbornly refused to tick up towards the bank's two-percent target; growth has remained sluggish and the bank is stuck in neutral, without a major policy change in years. The bank is in "deadlock," Shigeto Nagai, head of the Japan department at Oxford Economics told AFP. "They can't tighten, they can't ease further from here. They have to stick to the current policy but inflation will not rise," added Nagai.
To the surprise of no one, the bank held firm on its policy on Wednesday, pledging to keep interest rates at ultra low levels for "an extended period of time." Shirai says Kuroda "really thought" his policy would spark inflation of two percent. But as inflation refused to spike up, the bank kept putting off its deadline, eventually dropping any timeline to reach its two-percent target. This reduced the BOJ's credibility with markets, analysts say.
Kuroda's mistake, in Shirai's opinion, was the introduction of negative deposit rates in 2016 - effectively charging banks to stash money at the BOJ. "I was strongly opposed to it. I was so angry. It was sort of breaking the trust, the banking sector was shocked and they were not ready," she said. "It was also very negative for consumers. I think it was a disaster."
Now, while other central banks around the world like the European Central Bank and the Federal Reserve are tightening their monetary policy, the BOJ is in a very delicate position, analysts say. Even though it has maintained its asset buying target, the BOJ has gradually started to reduce the actual amount of government bonds it buys per year - dropping to around 40 trillion yen.
The bank also tweaked its monetary policy in July to pave the way for future tightening but it will find it almost impossible to normalise the situation, warns Shirai. "Can we reduce it like the Fed is doing? The amount is so huge, I really don't see how we can reduce it," warns Shirai. The bank has now amassed assets equivalent to Japan's entire gross domestic product and any sign it is shedding these could cause turmoil in the markets. Nagai from Oxford Economics says low inflation is a structural problem in Japan with its ageing population.
"Large portion of savings are in the hands of senior people and they don't spend a lot. Younger generations have more appetite for goods and products and services but their pay is not high enough," he said. He said there was "little prospect" of hitting the target, even in 2021. "Basically, we consider it will be stable around one percent and that is kind of the ordinary temperature for this kind of ageing society."
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