BOJ faces increasing risks as monetary easing drags on

Oct 04, 2017 | News On Japan

Oct 04, 2017 (Nikkei) - While the Federal Reserve is entering the final phase of its exit strategy, there is no end in sight for the BOJ's massive monetary easing policy, which has seen nothing but expansion during Gov. Haruhiko Kuroda's term.

But with Japan's economic sentiment clearly recovered, concerns are now mounting over the policy's longevity. In addition, the BOJ may face political pressure to curtail its monetary stimulus, and even give up on reappointing Kuroda, if Tokyo Gov. Yuriko Koike's new party wins the general election on Oct. 22.

According to the BOJ's closely watched Tankan quarterly survey released Monday, the key index for large manufacturers' sentiment stood at 22 in September, its highest since September 2007. A better economic outlook supported by ultra-easy monetary conditions may trigger calls for the stimulus package to be scaled back.

On the political front, Tokyo Gov. Yuriko Koike's newly formed Kibo no To, or Party of Hope, is gaining support and could pose a genuine challenge to Prime Minister Shinzo Abe's Liberal Democratic Party and junior coalition partner Komeito.

The ruling coalition has championed the current accommodating monetary policy, but the BOJ would not enjoy the same level of support from Koike's party if it wins, and Kuroda could end up headed for the exit door.

But it is important to understand what happens if the bank does start pulling out from its ultra-easy monetary policy.

Once the BOJ enters a rate-hike cycle, it will see ballooning interest payments on current deposits held by financial institutions at the bank, potentially damaging its financial health.

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