EDITORIAL: New BOJ Chief Needs Creative Easing Approach

TOKYO (Nikkei) -- The Bank of Japan's new leadership has vowed to use every means at its disposal in working with Prime Minister Shinzo Abe's government to end Japan's deflation.

Flexibility will be key as the BOJ tries to come up with new and effective measures to further ease credit.

Haruhiko Kuroda, the bank's new governor, said it is "desirable" for the BOJ to meet its 2% inflation target in about two years, at his first press conference on Thursday, one day after assuming his post. The BOJ will carry out "bold monetary easing both in terms of quantity and quality," Kuroda said.

Japan's nominal gross domestic product in fiscal 2011 was 9% lower than its peak in fiscal 1997 and about the same as 20 years ago. Deflation has undeniably left deep scars.

Aggressive monetary relaxation is essential to Japan's economic rejuvenation. Kuroda repeated pledges to take strong measures aimed at improving market sentiment and the real economy.

The question is how the BOJ under Kuroda's leadership will carry out his plans. The bank needs to find new and creative ways to communicate its intentions to markets by expanding its monetary easing, based on an effective zero interest rate and purchases of government bonds and other assets.

Take Me Higher

The 2% inflation target is a high hurdle. If temporary changes such as the increase in the consumption tax and higher energy and food prices are excluded, it will not be easy to reach the target within two years.

Economic and market conditions may change as the monetary easing program progresses, brining unwanted side effects such as a surge in speculative capital. The BOJ should avoid a rigid and mechanical easing of credit aimed solely at meeting the inflation target.

Of course, Japan cannot pull out of its lingering economic stagnation through the BOJ's efforts alone. The government should not rely exclusively on monetary easing and fiscal spending, but should promptly implement economic growth strategies centered on participation the Trans-Pacific Partnership free trade pact and deregulation.

The government must also make sure the BOJ's purchase of government bonds is not seen as financing Japan's fiscal deficit. It is vitally important to put the government's books in order by combining the consumption tax increase with spending cuts.

Masaaki Shirakawa, Kuroda's predecessor, repeatedly stressed the importance of growth strategies and fiscal discipline. While it is good for the new BOJ governor to cooperate with the government, he should not hesitate to speak his mind to his counterparts.

(The Nikkei, March 22 morning edition)

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