The Bank of Japan: Time for action

Another set of measures to tackle deflation

CONSERVATIVE, cautious and cowardly: the Bank of Japan (BOJ) has endured all manner of insults over the years. Among the complaints from critics is the charge that the central bank could have boosted Japan’s economy if it had increased its balance-sheet more rapidly during the financial crisis.

The BOJ believes there is only so much a central bank can do if businesses won’t borrow and banks won’t lend because growth prospects are meagre and firms are already stuffed with cash. But politicians are threatening to introduce laws to dilute the bank’s independence. And its counterparts are being embarrassingly dynamic. In January the Federal Reserve set an inflation target of 2% and promised near-zero interest rates until the end of 2014; the European Central Bank is lending money to euro-zone banks like there’s no tomorrow. Inaction is not an option.

So on February 14th the BOJ tried to disprove its critics. First, it changed its wording on price stability. Instead of calling it an “understanding” among the nine individual policy-board members, it now refers to price stability as a “goal” of the institution. Importantly, the term in Japanese, medo, does not mean “target” but implies a vaguer aspiration, unsurprising given that Japanese bureaucrats must “take responsibility” if formal targets are not met. Nonetheless, it still marks progress.

Second, the BOJ increased its ongoing credit-easing programme by agreeing to purchase an additional ¥10 trillion ($130 billion) in long-term Japanese government bonds by the end of 2012. That triples the amount of its monthly purchases and brings the overall amount of credit easing to ¥65 trillion. The increase is meant to spur bank lending and create modest inflation—the BOJ said it wanted annual consumer-price increases “at 1% for the time being”.

The stockmarket leapt to a six-month high following the BOJ’s announcement. Yet the economy still faces some severe headwinds: a declining population, sluggish global growth and a still-strong yen that eats into corporate profits. Fourth-quarter GDP figures released on February 13th show that the Japanese economy shrank by an annualised 2.3% from the previous quarter, the fourth decline in five quarters.

So critics will again complain that the BOJ is doing too little. That charge will be less fair than it used to be. And, as the gentlemen of Nihonbashi subtly stated in their communiqué, it is up to banks, firms and the government to play a role in revitalising the Japanese economy, too.



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