The Bank of Japan under its new governor, Mr. Haruhiko Kuroda, came up with a bold monetary easing policy Thursday, aimed at achieving a 2 percent inflation target in two years. The BOJ will double the monetary base ¡ª the amount of cash circulating in the market and commercial banks¡¯ reserves at the BOJ ¡ª in two years, start buying government bonds of all maturities including 40-year bonds, and extend the average remaining maturity of government bonds in its possession from less than three years to about seven years.
Gov. Kuroda¡¯s declaration that the central bank will ¡°enter a new phase of monetary easing in terms of quantity and quality¡± shows his strong determination to pull the Japanese economy out of its long-term deflation.
While it is hoped that the BOJ¡¯s new policy will lead to increased personal consumption and capital investment, the bold monetary easing carries the risk of causing asset bubbles. The ultimate goal should be rises in workers¡¯ wages and expansion of employment ¡ª not rises of prices, per se. The central bank should prevent, at any cost, a situation in which inflation occurs without improvements in wages and employment.
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