Bank of Japan Engaged in Long-Term Battle Against Deflation in 2015: Revealed Transcripts
In the spring of 2013, the Bank of Japan (BOJ) introduced a groundbreaking monetary easing policy, aiming to achieve a 2% inflation target within about two years. This policy, a combination of quantitative and qualitative easing, initially showed promising results, with inflation, as measured by the core consumer price index (excluding fresh food), rising to around 1.5%. However, the road to sustained inflation proved to be challenging, and by 2015, inflation had stagnated near zero, struggling against deflationary pressures.
Two key factors contributed to the flat inflation in 2015. First, a consumption tax hike in April 2014 dampened consumer spending and economic activity. Second, a sharp decline in crude oil prices weighed down overall price levels and inflation metrics.
At an April 2015 policy meeting, BOJ Deputy Governor Hiroshi Nakaso noted that the easing was showing its initial intended effects. Yet, other BOJ policy board members expressed concerns about potential negative consequences if the massive easing continued for too long. These concerns reflected the difficulty in balancing stimulus with financial stability risks.
The effects of the BOJ’s easing policy were far-reaching. Temporary inflation gains fell short of the 2% target, but the policy led to extensive purchases of Japanese government bonds (JGBs) and asset purchases to inject liquidity. This, combined with other government-related asset decisions, such as the Government Pension Investment Fund (GPIF) increasing foreign asset holdings while reducing JGB exposure, resulted in a rapid depreciation of the yen against the US dollar.
The yen depreciation was both an intended consequence to boost exporters and a market reaction to combined fiscal and monetary maneuvers, affecting Japan’s trade competitiveness.
The transcripts from the BOJ's meetings on April 8, 2015, and July 16, 2021, were released, revealing the struggles of the BOJ policymakers with deflation in the first half of 2015, two years after the introduction of their monetary easing policy. The transcripts showed that the concerns raised by some members of the BOJ's policy board were about potential adverse impacts if the policy remained in place for a prolonged period.
The BOJ’s massive monetary easing in 2013-2015 was met with structural challenges, including tax changes and external commodity price shocks that offset inflation gains, leading to a prolonged struggle with deflationary pressures well into 2015. This scenario exemplifies the challenges of combating deflation in a mature economy with structural issues and external shocks, despite aggressive monetary easing by the BOJ.
**Key points:**
- Policy Introduced: Quantitative and qualitative easing (April 2013) - Initial Inflation Impact: Core CPI rose to ~1.5% briefly - Challenges: Consumption tax hike (April 2014), lower oil prices - Inflation in 2015: Nearly flat, struggling against deflation - Policy Effects: Massive asset purchases, yen depreciation - Policy Board Concerns: Risks of prolonged easing
In the transcripts of the Bank of Japan (BOJ)'s meetings on April 8, 2015, and July 16, 2021, BOJ policymakers discussed potential adverse impacts if the monetary easing policy remained in place for a prolonged period. Meanwhile, the decline in crude oil prices in 2015, alongside the consumption tax hike in April 2014, proved to be key factors contributing to the flat inflation rate.
