TOKYO: The Bank of Japan will publish its findings next month on the pros and cons of different unconventional monetary easing tools used in its 25-year fight against deflation, in another symbolic step towards the end of its massive stimulus measures.

Although the BoJ said the outcome of the review would not have direct implications for monetary policy in the short term, it will likely include findings and investigations that support its intention to gradually continue policy normalization.

The BoJ will publish its findings after its final policy meeting of this year on December 18-19, when some analysts expect it to raise interest rates from the current level of 0.25 percent.

This review will be the BoJ’s first attempt to more thoroughly and analytically examine the downsides of prolonged monetary easing.

This will notably explain how central banks have limited power to change public perceptions of future price developments, as shown by the mixed results of former governor Haruhiko Kuroda’s radical stimulus measures that sought to steer Japan out of economic crisis. a deflationary mindset.

The findings of Governor Kazuo Ueda’s flagship project, which began when he took office in April last year, could provide insight into the tools the BOJ would use – and prefer not to use – to deal with the next economic slowdown.

It could also include guidance on what risks the BoJ might focus on as it continues to scale back asset purchases and raise interest rates from levels still near zero.

“We hope to provide elements that will be useful in thinking about a desirable long-term monetary policy,” BoJ Governor Kazuo Ueda said at a press conference on October 31.

This review could become a practical guide for other central banks as an encyclopedia of unconventional easing tools and their effectiveness.

Japan’s 25-year experience of deflation and economic stagnation has forced the BoJ to pioneer unconventional policies such as zero interest rates and quantitative easing.

Other global central banks subsequently resorted to similar drastic measures during severe recessions such as the global financial crisis and the COVID pandemic, but were largely able to recover relatively quickly when their economies began to bounce back.

As a board member, Ueda played a key role in the BoJ’s 1999 introduction of forward guidance – or a promise to keep rates low for an extended period in the hope of stimulate demand.

The most controversial policy came in 2013 when, under Kuroda, the BoJ launched a massive asset purchase program later combining negative interest rates and controls on bond yields.

As inflation remained below its 2 percent target, the BOJ conducted several reviews of the side effects of prolonged easing, mainly to extend the life of its stimulus measures.

This time the review will take a step back approach to what didn’t really work. Specifically, he will explain how Kuroda’s stimulus measures revived growth and created jobs, but only raised inflation by 0.7 percentage points, not enough to reach the objective of the BoJ.

It will also highlight major flaws such as how the BoJ’s huge asset purchases and capping of bond yields have drained market liquidity, distorted asset prices, eroded bank profitability and constrained institutions financial institutions to increase high-risk loans, such as those to the real estate sector.

These findings will be based on nearly three dozen academic research papers authored by its staff, many of which have already been published by the BOJ.

WHAT’S NEXT?

Another takeaway would be the results and surveys showing how Japan is experiencing structural changes that allow the BOJ to increase borrowing costs.

Among them, a survey conducted by BoJ branches shows that more and more companies now view rising prices and wages in a more positive light than in the past.

Other research that will be included in the analysis will explain how the tightening labor market and rising material costs are moving companies away from their long-held aversion to price increases.

In a speech in May, Vice Governor Shinichi Uchida said Japan was close to eradicating a “deflationary norm,” or the perception among households and businesses that prices and wages will not rise. many – remarks preceding the climax of the study.

The BoJ, however, will not address thorny issues such as the cost of its huge holdings of exchange-traded funds (ETFs), which could damage its balance sheet if stock prices collapse.

It is also unlikely to provide an accurate estimate of Japan’s neutral interest rate, or the rate at which monetary policy is neither contractionary nor expansionary.

The BoJ has not disclosed its own estimate of the neutral rate, which is crucial for assessing how much it could raise borrowing costs. Analysts put it at around 1 percent, well above the BoJ’s current policy rate of 0.25 percent.

Overall, the review will aim to take a neutral and scientific view on the controversy surrounding the BoJ’s sweeping stimulus measures, which have caused a deep and sometimes emotional divide between its supporters and critics.

“There will be no clear answers to many of the questions addressed by the review. But the aim was to hold discussions about past monetary easing measures and to highlight some positive changes occurring in the “economics,” said Mari Iwashita, chief market economist at Daiwa. Securities and a seasoned observer of the BoJ.

“It’s a good way to move forward and it comes at a good time when Japan is finally seeing the first signs of sustained inflation.”