Haruhiko Kuroda: Monetary policy - its effects and implementation
Opening remarks by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the 2015
BOJIMES Conference, hosted by the Institute for Monetary and Economic Studies, Bank of
Japan, Tokyo, 4 June 2015.
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I. Introduction
Good morning, ladies and gentlemen. It is my great honor to say a few words at the
beginning of the 22nd BOJ-IMES Conference. On behalf of my colleagues at the Bank of
Japan and myself, I would like to express my sincere welcome to all of you.
At last year's conference titled "Monetary Policy in a Post-Financial Crisis Era," we had active
discussions on fundamental issues of monetary policy during the period of slow economic
growth following the global financial crisis. Since then, there has been further progress in
research on the effects of unconventional monetary policy in academic and central bank
circles. Besides, growing attention has been paid to renewed debate over the slow recovery
after the financial crisis, as represented by the thesis of secular stagnation. Against the
backdrop of these factors, we have selected "Monetary Policy: Its Effects and
Implementation" as the theme of this year's conference. The aim is not only to keep
monetary policy at the center of the discussion, but also to put greater emphasis on
implications for policy conduct in practice. I hope that, in light of the progress in monetary
policy research and the recent developments in the global economy, we will have frank and
lively discussions on the monetary policy challenges that we central bankers currently face.
To kick things off, I would like to raise some issues relevant to these challenges.
II. Global economic conditions and current issues concerning the conduct of
monetary policy
Over the past year, the global economy as a whole has been recovering moderately.
However, we have observed considerable differences in developments of economic activity
and prices among countries and regions. In reflection of these differences, diverging
directions of monetary policy among the United States, Europe, and Japan have become
increasingly apparent. This certainly was a major feature of monetary policy in the global
context for the past year. Meanwhile, headline inflation rates dropped globally, due primarily
to a plunge in crude oil prices. With these significant developments in mind, I would like to
raise three current issues concerning the conduct of monetary policy.
The first issue concerns the effects of unconventional monetary policy and its transmission
channels. In terms of monetary policy implementation, the European Central Bank launched
the expanded asset purchase programme in January, and many of the major central banks
have now adopted quantitative easing (QE). On the research front, academic and central
bank circles have accumulated studies on unconventional policy that have been conducted
vigorously to date. These studies have demonstrated that unconventional measures, such as
QE and forward guidance, have been generating monetary easing effects, primarily through
influencing long-term interest rates and asset prices, as well as inflation expectations. I
believe that it will be meaningful if we can further promote a common understanding on
unconventional policy by sharing the various insights obtained from both implementation and
academic research of monetary policy.
The second issue pertains to inflation expectations and the decline in crude oil prices. The
plunge in crude oil prices since 2014 has posed a new challenge for the conduct of monetary
policy. In October 2014, the Bank of Japan decided to expand quantitative and qualitative
monetary easing (QQE). This policy decision aimed at maintaining the improving momentum
of expectation formation and at pre-empting manifestation of a risk that the decline in the
inflation rate, even though caused by the oil price decline, could delay conversion of the
deflationary mindset, which had been progressing steadily under QQE. The background to
the policy decision is that, unlike the United States and other countries where medium- to
long-term inflation expectations have been well anchored, Japan is in the midst of drastically
changing the deflationary mindset; namely, re-anchoring inflation expectations to the price
stability target of 2 percent. Inflation expectations are obviously one of the most important
variables for the conduct of monetary policy. Therefore, it is a major policy concern for
central bankers to gain a better understanding of how to measure inflation expectations, how
such expectations actually affect firms' price- and wage-setting behavior, as well as
households' consumption decisions, and how to evaluate the degree to which inflation
expectations are anchored. I hope that further progress will be made in research in this field.
The third issue is how to deal with the international spillovers induced by the diverging
directions of monetary policy among advanced economies. In emerging economies,
monetary authorities have paid more attention to developments in foreign exchange rates
and international capital flows that are influenced by major central banks' policy actions and
announcements of their future directions of policies. In addressing these international
spillovers, how to use monetary policy, macro-prudential policy, and capital flow
management policy in combination has come to be a crucial issue, particularly for countries
that have financial system vulnerability.
III. Policy issues concerning slow post-financial crisis recoveries
Thus far, I have explained the three issues central banks now face in the conduct of
monetary policy. Next, I would like to raise some policy issues from a longer-term
perspective. In the wake of the global financial crisis, economic recoveries around the world
have been modest relative to past recoveries despite the implementation of unconventional
monetary policy. For the past year or so, academic and central bank circles have actively
discussed how to interpret this fact. Such discussions have been initiated by Lawrence
Summers' revisit to the "secular stagnation thesis" advocated originally by Alvin Hansen in
the late 1930s. Various views have been raised regarding the causes of slow post-financial
crisis recoveries; for example, the persistent weakness on the demand side of the economy
and the low productivity on the supply side.
There have been wide-ranging interpretations and views on secular stagnation. In light of the
discussions over slow post-financial crisis recoveries, I would like to raise three policy issues.
The first issue is to what extent central banks should consider the impact on the supply side
of the economy in conducting monetary policy. As a backdrop of the slow recoveries
following the global financial crisis, it has been pointed out that the interaction between
demand and supply has gained importance. That is, the weakness in demand impairs the
supply side mainly by discouraging workers from participating in the labor market and
dampening firms' investment in capital stock and in research and development. Furthermore,
a decline in expectations about future economic growth may cause insufficiency of demand.
That said, the conventional view takes the supply side, such as the potential growth rate and
the natural rate of unemployment, as a given in the conduct of monetary policy. How would
the mechanism of slow recoveries affect such a conventional view?
The second issue is with regard to what monetary policy tools are desirable under a low
natural rate of interest. If the natural rate remains at a relatively low level over the medium to
long term, compared with in the past, as suggested by the secular stagnation thesis, then the
nominal interest rate is likely to stay around zero. Furthermore, even after the normalization
of interest rates, the nominal rate might fall back to zero or to a very low level. In that case,
would unconventional monetary policy continue to be important even "beyond the exit"?
Moreover, would it eventually be regarded as conventional in an economy under the "new
normal"?
The third issue concerns the optimal policy mix for an economy undergoing medium- to
longterm stagnation with a low natural rate of interest. What would be the best policy mix among
monetary policy, fiscal policy, and structural reform in such a situation? Are there any
constraints to the implementation of the best policy mix, such as mounting government debts
or constraints under a common currency area? What alternative mix of policies could be
considered as a second best choice?
IV. Concluding remarks
Every word and deed of central banks around the globe has been drawing more attention as
the diverging directions of monetary policy among advanced economies become apparent.
The issues I have raised so far are all complex, and there are no quick, definitive solutions
for them. Nevertheless, I strongly believe that, at this one-and-a-half day conference, we will
address the issues we currently face and find our way forward through lively discussions. I
trust that many of you are familiar with the story of Peter Pan, in which it says, "the moment
you doubt whether you can fly, you cease forever to be able to do it." Yes, what we need is a
positive attitude and conviction. Indeed, each time central banks have been confronted with a
wide range of problems, they have overcome the problems by conceiving new solutions. I am
sure that we all can share a conviction backed by our collective experience and wisdom. I
would like to close my remarks now as we ready ourselves for discussion.
Thank you for your attention.