Bank Of Japan Are Tightening Fiscal Policy To Combat Deflation

Japan has been pumping money into its economy for years to help fight deflation. However things could change as Haruhiko Kuroda, Governor of the Bank of Japan (BoJ) wants to move towards a more stringent fiscal policy.

This was revealed in his recent comments at a talk with business leaders in Nagoya.

In a statement, Mr. Kuroda said

Over the past five years, Japan's economy has clearly improved. Prices have improved steadily compared with five years ago, when the economy was suffering from deflation. However, it has been taking time to achieve the price stability target of 2 percent. In such a situation where economic and price developments have been somewhat varied, it has become necessary to persistently continue with powerful monetary easing while considering both the positive effects and side effects of monetary policy in a balanced manner

These remarks highlight the BoJ's outlook towards its monetary policy. The central bank has already slowed down its asset purchases and has raised the ceiling on 10-year bond yields to a higher 0.2 percent. This shift means that the BoJ is keeping up with its other global counterparts like the US Federal Reserve. However, it does put the economy at risk when the current inflation rate is still far from the stated goal of two percent.

Financial Times

Kuroda In The Lead

Kuroda has been the head of the BoJ since 2013. He was appointed by Prime Minister Shinzo Abe to help implement a stimulus package that would help stop Japan's two decades of on-and-off deflation. In support of this, Kuroda launched a program of bond purchases that peaked at ¥80 trillion a year and slashed overnight interest rates to minus 0.1 percent.

The result is that Japan's economy has been enjoying a trend of growth though it did stumble in 2014 and 2015. The only blot is the sluggish inflation rate. The weak inflation rate has forced the BoJ to keep up its stimulus program, even though the low rates have hurt financial institutions and weakened bond market liquidity.

Future plans are still unclear but Kuroda did reaffirm that there will be no immediate fiscal policy tightening. This is because of the possibility that consumption tax may rise to 10 percent next year. He did emphasize that interest rates will remain at their low levels for some time now in the future. The BoJ will be taking a wait-and-see approach though before taking any more measures to help the economy.

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