The Bank of Japan is laying the groundwork for a future withdrawal of its stimulus program with some policymakers flagging the increasing cost of prolonged easing, according to the summary of opinions at the bank's April 26-27 policy meeting, released May 10.
"It is necessary to make efforts to give a clear explanation on the meaning of 'exit' and 'normalization' and gain understanding among the public that the bank can respond flexibly depending on developments in economic activity and prices as well as financial conditions," one member said.
Some policymakers called for careful scrutiny of the increasing negative effects of years of ultralow interest rates. "Looking at recent developments in corporate bond markets and bank lending, monetary easing effects — stemming from the decline in the long-term real interest rates — on economic activity and prices could be becoming smaller," one member said.
"It is important to make further consideration concerning the desirable shape of the yield curve, given the cumulative impact on financial institutions' financial strength becoming increasingly severe."
One member said the bank should examine "from every angle" the positive and negative effects of purchases of risky assets including exchange-traded funds.
Further opening the debate on conditions for a stimulus exit, Bank of Japan Governor Haruhiko Kuroda said at a May 10 seminar that the central bank could debate conditions for exiting from its ultra-easy policy if prospects for achieving its inflation target improve.
But he refrained from hinting at the timing or means of ending the BOJ's stimulus as inflation was still distant from its 2% target. Japan's core consumer prices, excluding fresh food, rose by 0.9% year over year in March before seasonal adjustment.
"When the possibility of achieving our price target heightens, conditions for an exit would fall into place," Reuters reported Kuroda as saying. "The BOJ's policy board could then discuss conditions for an exit."
With the economy in good shape and the labor market tightening, Kuroda said inflation expectations may not increase smoothly, adding that the key to achieving 2% inflation is to change public perceptions that prices will not rise much, he said in the Reuters report.
The BOJ kept policy rates unchanged in the April meeting, but removed wording on achieving its 2% inflation target around fiscal 2019. One member said the timing of reaching around 2% inflation in the bank's outlook report is "merely a projection, and thus changes in such timing and policy adjustments are not mechanically linked."