In 2015 the Nikkei Stock Average, which in 2012 was almost as low as 9,000 yen, recovered to over 20,000 yen at one point. The Bank of Japan’s “new dimension in monetary easing” somehow succeeded in changing people’s mindset. Having said that, the initial commitment of a 2% inflation rate within two years has not been achieved. Nevertheless, having adopted this policy, the government has a responsibility to restore the Japanese economy to a solid growth trajectory as part of its monetary and economic policy.
1. Implement Policies to Maximize the Impact of Monetary Easing
Monetary easing alone has not improved the real economy. Economic policies also need to be implemented to maximize the impact on the real economy. However, simply reheating government initiatives such as “comprehensive economic policy,” “growth strategy,” and “emergency economic stimulus measures” would be pointless. It will be important to get rid of bedrock regulations relating to healthcare, agriculture, labor, etc. and create new markets. During the period of easy money created by the Bank of Japan’s new dimension in easing, the government has a duty to steadily implement a growth strategy to expand the market through regulatory reform, policies to promote the establishment of startups, and the TPP. This was mentioned in the economy and industry section of 100 Actions.
2. Guard Against Risks. Establish a Structure that Allows Policy to be Changed as Needed
As a result of the new dimension in monetary easing, Japan’s monetary base doubled from 138 trillion yen to 270 trillion yen in just two years, and as of August 2015 it stood at 323 trillion yen. We are now in uncharted territory. The government and the Bank of Japan need to establish a structure that enables them to alter policy whenever necessary.
A big worry is an increase in interest rates. As the economy improves, the demand for funds rises and interest rates climb. This much is obvious, but it poses a challenge that Japan, which has grown accustomed to low interest rates, will need to overcome. The public sector also faces major challenges. In fiscal 2013 new government bond issuance reached 44.2 trillion yen. Not many people realize this, but in addition to new government bonds, the Ministry of Finance issues bonds to repay existing bonds each year. In fiscal 2013 the value of such bond issuance was expected to reach 115.5 trillion yen. In other words, the government is walking a tightrope as it is dependent on the market buying over 160 trillion yen in debt each year to stay solvent. So because the government is borrowing 160 trillion yen every year, each one-point rise in interest rates increases the repayment burden by 1.6 trillion yen. A two-point rise increases it by 3.2 trillion yen, which makes one point worth of consumption tax revenue (2.5 trillion yen) evaporate.
The Bank of Japan should proactively create opportunities for the frequent and open exchange of opinions with market participants to ensure that its messages are accurately conveyed to the market.
3. Prepare an Exit Strategy
The fact that the Bank of Japan embarked on this new dimension of monetary easing inevitably means that one day it will need to adopt a strategy for exiting the new dimension in monetary easing.
In the U.S., the end of quantitative easing and the review of the zero-interest-rate policy caused a flight of capital from emerging markets and a worldwide plunge in stock prices.
The Bank of Japan’s goal is to bring the country out of deflation, but when this happens, the market will obviously react, just as it did in the U.S. In addition, the Bank of Japan’s monetary policy is currently looser than that of its U.S. counterpart, so returning to a normal monetary policy would constitute a new dimension in policy and could cause turmoil in the markets. With regard to an exit strategy to be implemented in the near future, the government and the Bank of Japan need to conduct meticulous simulations and careful preparations, which should also reflect U.S, policy and past experience, and prepare policies that make it possible to respond to any situation.