Bank of Japan faces credibility crisis

http-%2F%2Fcom.ft.imagepublish.prod.s3.amazonawsThe Bank of Japan has a crisis of credibility, according to the Financial Times.

The tactics it is using to try to invigorate Japan’s economy are not yet working and it has made a promise which seems impossible to meet.

For that reason, trust in the Bank and its governor Haruhiko Kuroda is undermined both within Japan and abroad.

The promise the Bank has made is to raise Japan’s inflation rate to two percent “within a couple of years.” A former policy maker at the bank, Sayuri Shirai, has pointed out that Japan has not had inflation rate that high for more than two decades. She believes it is time to cut the inflation target to one percent.

The methods by which the Bank of Japan is trying to create inflation include a negative basic interest rate of -0.1%. This effectively charges banks money to keep their cash in the system and is designed to prompt them into lending more to consumers and businesses. However, Forbes Asia claims the policy discourages lending.

There is speculation that the negative interest could soon be increased from -0.1% percent to -0.2%. An announcement is due following the Bank’s policy meeting on September 21st.

The negative interest rate is unwelcome for savers who have put their money into the banks, many of whom are old people. Japan has one of the highest savings rates in the world.

The negative rate is not the most expensive of the Bank of Japan’s policies. It is currently buying ¥80 trillion ($780 billion) worth of Japanese government bonds a year.

This policy, sometimes known as quantitative easing, is designed to flood money into the system; “printing money” is the way journalists sometimes refer to it. Yet it adds to the mountain of debt the government must face in the future. It also interrupts the system by which the government uses banks to fund its borrowing.

For most people, huge numbers and jargon make it difficult to grasp complex monetary policy. Yet everyone can see the targets of higher inflation and sustained economic growth are not yet being met.

This undermines credibility of the Japanese Prime Minister Shinzo Abe who is working closely with the Bank of Japan.
If people lose trust in both the government and the central bank it creates an environment of cynicism. Of course, Japan is not the only country to struggle to respond to the economic disruption following the 2008 financial crisis.

Yet other countries will not wish to copy Japan’s policies if they leave a trail of broken promises and distrust.

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