BOJ appointment key to course of monetary policy in 2018

January 1, 2018

Tokyo- The appointment of the next Bank of Japan governor will be the key to predicting the course of its monetary policy in 2018, financial market and other experts say.

Prime Minister Shinzo Abe highly rates current Governor Haruhiko Kuroda, who will reach the end of his term in April. "I trust his prowess," Abe has said.

Many financial market watchers expect Kuroda to stay on.

The BOJ is likely to maintain its current policy, featuring massive asset buying and short- and long-term interest rate targets, if Kuroda remains at the helm.

But how to normalize the unconventional monetary policy may become a hot topic as adverse side effects from the current policy, including negative interest rates, are increasing drawing attention.

Kuroda and Abe attended a meeting of the Japan Business Federation, or Keidanren, on Tuesday, the fifth anniversary of Abe's return as prime minister.

"In order to ensure an end to the longstanding problem of deflation, we need to strengthen the positive economic cycle further in 2018," Abe told the meeting.

"We still have some more way to go before hitting our 2 pct inflation target," Kuroda said. "We'll continue our powerful monetary stimulus measures tenaciously."

Since Kuroda took office in 2013, the BOJ has eased monetary policy every year except 2017.

"The economy is faring well. The current situation does not require any additional measure," a BOJ executive said.

But some criticize Kuroda for failing to hit the BOJ's inflation target.

Japanese Ambassador to Switzerland Etsuro Honda, an economic adviser to Abe, has said the BOJ's current leadership should be revamped because it has failed to eliminate deflation.

Furthermore, a new BOJ policymaker has cast dissenting votes at monetary policy meetings since September 2017 to call for additional monetary easing measures.

Meanwhile, bank industry officials and critics warn of negative effects from the prolonged unconventional policy regime. Regional banks are particularly vulnerable, suffering deteriorating profitability caused by slimmer interest margins.

Kuroda himself discussed the topic in a speech in November, referring to the "reversal rate" theory that excessive drops in interest rates work to reduce the positive impact of monetary easing.

The BOJ is likely to maintain the current policy until deflation is fully eliminated. But Tsuyoshi Ueno, senior economist at the NLI Research Institute, said, "The BOJ should examine how to reduce the negative side effects." Jiji Press