Haruhiko Kuroda: Japan's unconventional monetary policy and
initiatives toward ensuring stability of the global financial system
Remarks by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the Federal Reserve
Bank of Kansas City Economic Policy Symposium, Jackson Hole, Wyoming, 24 August
2013.
* * *
Introduction
I am honored by the invitation to be a panelist at this traditional policy symposium hosted by
the Federal Reserve Bank of Kansas City.
The global economy is yet to completely recover from the aftermath of the Lehman shock,
and each country is grappling with its own thorny issues. Japan has not been able to escape
from a vicious cycle of deflation and stagnant economic activity for the past 15 years and
dynamism has gradually vanished from economic activity. For a sustained economic
recovery, it is necessary to overcome deflation and turn firms' and households' actions into
more proactive ones.
The content of my presentation is described in Chart 1 of the handout. I will first outline the
"Quantitative and Qualitative Monetary Easing" (hereafter QQE) that the Bank of Japan
introduced in April, and then follow this with the characteristics of the QQE's transmission
channels, focusing on the effects on real interest rates and on the natural rate of interest. I
will conclude by touching on several issues on the relationship between unconventional
monetary policy and the global financial markets.
I. Unconventional monetary policy in Japan
Outline of the QQE
As represented in the wording "quantitative and qualitative," the Bank's QQE aims to
overcome deflation through both a "quantitative" increase and "qualitative" changes in the
Bank's balance sheet. As shown in Chart 2, there are three points.
First, the Bank aims to achieve the price stability target of 2 percent in terms of the
year-onyear rate of change in the consumer price index (CPI) at the earliest possible time, with a
time horizon of about two years.
Second, as shown in Chart 3, in terms of "quantity," through purchases of various assets,
mainly Japanese government bonds (JGBs), the Bank aims to double the monetary base in
two years from 138 trillion yen at end-2012 to 270 trillion yen at end-2014. When looked at in
terms of a ratio to nominal GDP, this has already exceeded 30 percent in the second quarter
of 2013. Although it depends on future growth in nominal GDP, the ratio is likely to increase
to a level of over 50 percent in the fourth quarter of 2014.
Third, on the "quality" front, JGBs with all maturities, including 40-year bonds, were made
eligible for purchase. As a result, the average remaining maturity of the Bank's JGB
purchases will more than double to about seven years. By working on interest rates across
the yield curve, it is expected that the effects of the QQE on financial conditions and
economic activity will be strengthened. In addition, in order to affect premiums of risk assets,
purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts
(J-REITs) were increased.
Assessment of the QQE to date
The QQE has already started to exert effects. Let me point to three favorable turns, as
shown in Chart 4.
First, there has been a favorable turn in financial markets and corporate finance. As shown in
Chart 5, stock prices are rising. Long-term interest rates, while once faced with increased
volatility, have been almost flat recently despite a rise in interest rates overseas. Also, in
terms of corporate finance, bank lending has gradually been increasing its growth rate, and
lending rates have been at historical low levels.
Second, there has been a favorable turn in the public's expectations. Consumer sentiment
and business sentiment have improved markedly. Many indicators suggest that inflation
expectations have been picking up in the market, as well as among firms and households. A
recent development in one such indicator is shown in Chart 6. This development, together
with low and stable nominal interest rates, has been effective in lowering real interest rates.
The third favorable turn is in economic activity and prices, as shown in Chart 7. Private
consumption remains resilient on the back of improved household sentiment and the wealth
effect from the stock market rally. Business fixed investment is showing signs of picking up,
in line with improved business sentiment and corporate profits. The year-on-year rate of
change in the CPI has turned positive, reflecting both improvement in the economy and the
yen's depreciation.
II. Unconventional monetary policy, real interest rates, and natural rate of
interest
In this way, the Bank's QQE has already started to gradually exert effects. Now, as in
Chart 8, let me next look at the transmission mechanism of the policy effects from the two
perspectives of real interest rates and the natural rate of interest.
Needless to say, the effects of monetary policy will be determined by the difference between
real interest rates and the natural rate of interest. Thus, there are two ways for monetary
easing to be effective: First, lower real interest rates, given that the natural rate of interest is
unchanged, or, second, increase the natural rate of interest, given that real interest rates are
unchanged.
The Bank of Japan's QQE seems to have started to exert effects both in terms of lowering
real interest rates and an increase in the natural rate of interest. Let me explain this in order.
Lowering real interest rates
First, let me consider the effect of lowering real interest rates.
When lowering real interest rates as a policy, a central bank normally lowers nominal interest
rates. Of course, for such policy to be taken, there should be sufficiently large room for
reduction in nominal interest rates. For example, in the United States, based on the
assumption that inflation expectations were anchored, it can be interpreted that real interest
rates have been lowered as a result of reducing nominal interest rates.
In Japan, as nominal interest rates were already at low levels, there was limited room to
lower real interest rates by reducing nominal interest rates. Another way was needed to
lower real interest rates. Namely, an increase in inflation expectations. While the purpose of
lowering real interest rates itself was the same as in the United States, there was a stark
contrast in terms of a strategy to achieve that purpose.
The Bank aims to achieve the 2 percent price stability target with a time horizon of about two
years and implement measures toward achieving the target, which would be effective in
overcoming the policy constraints. With the implementation of the QQE, inflation
expectations have actually been edging up, as I mentioned earlier, and thus the Bank's
policy has started to exert its intended effects.
An increase in the natural rate of interest
As the second issue for discussion, let me consider the relationship between unconventional
monetary policy and the natural rate of interest. This issue has been little discussed, and
thus might be controversial to some extent.
To begin with, the natural rate of interest corresponds to expected returns from firms' capital
investment. The Bank's QQE aims at conquering the "deflationary sentiment" that has been
entrenched among the public and restoring what had been the intrinsic dynamism of Japan's
economy. As a consequence of the policy, if Japan's growth potential recovers, investment
opportunities will increase and the natural rate of interest will rise.
As an unconventional monetary policy that contributes to strengthening growth potential, the
Bank has established a facility called the "Loan Support Program." The facility is composed
of two measures. One is the fund provision for economic growth, which provides funds for
financial institutions' loans and investment that contribute to Japan's economic growth. The
second is the fund provision to stimulate lending, which provides long-term funds at low
interest rates for financial institutions' incremental lending, in order to support their efforts to
increase lending. The facility aims to promote financial institutions' initiatives toward finding
demand for funds in high-growth firms and business fields.
I would like to add one point here; namely, that maintaining the natural rate of interest at a
high level is also important as a means of increasing the resilience of the economy against
various shocks. In that regard, when the natural rate of interest increases sufficiently, the
possibility that the policy rate will hit the zero lower bound again declines and the resilience
of Japan's economy is likely to increase.
III. Unconventional monetary policy and global financial markets
Lastly, as already discussed in this symposium, let me touch on issues that relate to global
liquidity and cross-border capital flows. Given the wide spectrum of important issues within
this set of topics, let me focus on two such issues - taking into account my own experience -
as shown in Chart 9.
Unconventional monetary policy and cross-border capital flows
First, the relationship between unconventional monetary policy and cross-border capital flows
is quite complicated.
While this is not new to central banks and related parties, almost all base money provided
through monetary policy will be accumulated in the form of deposits with a central bank.
Even if a country eases monetary conditions, this does not necessarily mean that money
being provided directly "spills over overseas."
Starting from such accumulated base money and changes in demand-supply conditions in
asset markets in which the Bank conducts purchase operation, the issue is with regard to
how financial market participants' expectations and transactions will change and how that will
affect cross-border capital flows.
This process is fairly complicated, and monetary easing does not necessarily lead to
crossborder capital outflows. For example, if growth expectations heighten due to monetary
easing, there might be capital inflows in search of a high natural rate of interest.
Importance of international coordination among central banks
Second, I would like to point out that - also in international coordination among central banks
- "unconventional" initiatives have indeed been reinforced.
In tandem with progress in financial globalization, the speed and magnitude of systemic risk
contagion among countries have increased, and due vigilance is called for regarding the
possibility that destabilization in the global financial markets will be a drag on the global
economy.
Following the Lehman shock, the Bank of Japan, in coordination with other central banks,
has endeavored to maintain the stability of the global financial system through initiatives such
as making currency swap arrangements, improving the framework of cross-border collateral,
and enhancing regional financial infrastructures, including fostering Asian bond markets.
As a person who has been involved in international finance in various positions, I would like
to emphasize that it is increasingly important to have international coordination with regard to
the prevention and management of a financial crisis.
Concluding remarks
The QQE aims to overcome deflation that has continued for 15 years and to rejuvenate
Japan's economy. While maintaining real interest rates at low levels through increasing
inflation expectations, the policy will exert its maximum effects by working also on the natural
rate of interest rate together with the government's growth strategy. The Bank of Japan will
pursue proper policy conduct to achieve the price stability target, while continuing to make
efforts to maintain the stability of the global financial system.
Thank you for your attention.
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