Tokyo: The Bank of Japan (BOJ) was once at the centre of Prime Minister Shinzo Abe’s audacious reflationary drive, but with little to show for three years of massive stimulus, it finds itself sidelined ahead of the upper house election this weekend.
Even as a strong yen keeps the central bank under pressure to ease monetary policy, the confusion sown by its unexpected shift to negative rates in January has seen it shunned by the government, which wants to shift the focus to fiscal stimulus.
“I don’t think it was wrong to adopt negative rates,” said Masahiko Shibayama, an influential aide to the prime minister.
“But looking at what has been happening, there’s no doubt it was poison,” he said, referring to the policy’s deep unpopularity among markets and the public.
Monetary policy was lauded as one of the “three arrows” of “Abenomics” – the nickname given to Abe’s bold campaign announced in 2012 to beat deflation – with fiscal stimulus and structural reforms being the other two arrows.
Haruhiko Kuroda got straight to work as BOJ governor after Abe handpicked him for the role in 2013, unleashing a massive money printing exercise designed to get inflation to 2% in two years. But with inflation now nowhere near that target, politicians seem happy to avoid the topic of monetary policy altogether.
Kenji Nakanishi, an election candidate for Abe’s ruling Liberal Democratic Party (LDP), told Reuters he sees no need for the BOJ to top up stimulus in the near-term.
“If we advocate aggressive easing, that could be taken as calling for further stimulus. That’s not the case,” said the former commercial banker, adding that voters remain unsure about how negative rates could help the economy.
Abe is casting the July 10 election for half of the seats in the 242-member chamber as a referendum on Abenomics, as doubts over whether the strategy is working grow.
Abe needs his ruling coalition to win a majority of the seats up for grabs to keep party members in line. His mandate would be further strengthened if his party alone wins a simple majority, LDP’s first since 1989, allowing him to say that Abenomics has won public endorsement.
No quick fix
Underscoring the fading appeal of monetary policy for lawmakers, the LDP has dropped any direct reference to the need for bold monetary easing from its campaign platform.
“It’s important to tackle structural reform without relying too much on monetary policy,” said Tomomi Inada, the party’s policy chief and a close ally of Abe, saying she saw no need for the BOJ to ease policy further.
Opposition parties are also in no mood to lean on the BOJ to prop up growth. The main opposition Democratic Party wants the BOJ to scrap its negative rate policy and abandon the two-year timeframe in achieving its 2% inflation target.
“We want to turn economic policy away from over-reliance on monetary policy, which is reaching its limits,” Shiori Yamao, policy chief of the Democratic Party, told Reuters.
“Negative rates could deal a lethal blow to regional economies, hurt depositors and could even tighten lending conditions for some firms,” she said.
Abe could still pressure the BOJ to deploy additional stimulus to counter shocks such as Britain’s vote to leave the EU.
But lawmakers, including Abe, no longer share Kuroda’s sense of urgency in achieving the 2% inflation target, as many households have yet to see wages rise as much to meet rising costs of living, analysts say.
“The relationship has definitely changed,” said Saori Katada, an associate professor at the University of Southern California, when asked about Abe and Kuroda.
“Kuroda has to go on, with or without [support] from the government,” she said.
Kazuo Momma, a former top BOJ bureaucrat who oversaw monetary policy, says one positive from three years of aggressive money printing was a recognition among the public that monetary policy alone cannot cure all ills.
“In the past, everything bad about the economy was blamed on the BOJ. Now, there are people saying that structural reforms are equally important,” he told Reuters. “There’s no quick fix. The most sustainable and definite way to boost Japan’s potential and heighten people’s confidence is to patiently pursue structural reform, even if that takes time.”