Bank of Japan’s policymakers are discussing the consequences of abandoning ultra-soft policy

In October, the Bank of Japan’s representatives discussed the need to study the consequences that the country’s economy is facing due to prolonged monetary policy easing and the consequences that it potentially might face by abandoning this strategy later.

Although there is no urgency in changing the current course of monetary policy, some policymakers consider the possibility of canceling the radical monetary stimulus implemented by Governor of the Bank of Japan Haruhiko Kuroda about ten years ago.

Overall, it may be noted that there has been a disagreement between the bank’s representatives on the question of maintaining or canceling the current monetary policy. On the one side, there is a soft Kuroda’s position, on the other, the intention of some members to leave the area of extremely low interest rates.

At the same time, most of the bank’s representatives showed the intention to adhere to the previous ultra-soft policy in order to raise wages and salaries enough and compensate people for an increase in prices and cost of living.

Meanwhile, inflationary pressure is broadening, thereby the possibility of the interest rate hike above the planned level shouldn’t be ruled out. Regarding this, the bank intends to continue studying the possible consequences of Japan's abandonment of the ultra-soft policy, which might significantly influence the market. It is also important to assess the readiness of the market participants for such changes.

In September, the core consumer inflation rate in Japan reached the high of 3% recorded for the first time since 2014. In combination with the yen’s fall to a 32-year low and the associated rise of the imported goods cost, it raised doubts in the bank’s strategy.

However, Kuroda excluded the possibility of adjusting the Bank of Japan's targets of minus 0.1% for short-term rates and near zero for 10-year bond yields, as he believes inflation will slow down during the next fiscal year and could fall below the 2% target.

Some market participants suggest that the Bank of Japan may change its policy next spring, when the term of Haruhiko Kuroda comes to an end.