BoJ: Costs and benefit framework - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that while Kuroda sees few limits to his policy tools, the key point is that deciding how much they should be used and in what mix is a matter of comparing “benefits and costs”.

Key Quotes 

“Kuroda notes that “additional monetary easing entails costs”.  But he said, “we should not hesitate to go ahead with it as long as it is necessary for Japan’s economy as a whole; namely, if its “benefits” outweigh its “costs.””

“Furthermore, what is important is that a balance between “benefits” and “costs” can change depending on the situation. Monetary policy should be conducted in a flexible manner. There may be a situation where drastic measures are warranted even though they could entail “costs””.

These thoughts generate questions – do the benefits currently outweigh the costs? Is the current policy mix appropriate or have the benefits and costs shifted such that the policy mix should be adjusted?  Does the current situation warrant drastic measures?

Kuroda goes some way to directly address these questions. His final paragraph said, I would add that the “benefits” of achieving the price stability target of 2 percent at the earliest possible time are enormous as Japan’s economy is finally overcoming deflation that lasted for a prolonged period of time. The Bank will continue to make its utmost efforts to achieve this commitment.”

He says here that the benefits are “enormous” implying they indeed outweigh the costs. He suggests having made progress, the BoJ should not give up now.

However, from the overall tone of the speech (progress being made, near full employment, adaptive expectations likely to respond to stabilization in oil prices), drastic measures may not be warranted.”