Federal Reserve Bank of Dallas President Robert Kaplan said that the “jury is out” on whether the Bank of Japan’s (BOJ) negative rate policy is working and that monetary policy alone will not fix the key problems Japan faces.
“Negative rates might buy them time. They might on margin help ease what they are trying to do, but they are not a substitute for structural reforms,” Kaplan said in an interview on Bloomberg Television in Jackson Hole, Wyoming, ahead of an annual policy symposium that began yesterday. “Japanese officials are painfully aware those structural reforms are not easy.”
After more than three years of pumping money into the financial system in an effort to stoke inflation and growth, Bank of Japan Governor Haruhiko Kuroda announced a comprehensive review of the central bank’s policies at a meeting last month.
A government report yesterday showed that Japan’s consumer prices last month fell for a fifth straight month, underscoring the BOJ’s struggle to spur inflation to its 2 percent target.
The BOJ’s introduction of negative rates on some bank reserves in January drew criticism from bankers, bond dealers and some lawmakers, as well as former BOJ executives.
Kaplan said the strengthening of the yen after the introduction of negative rates — when many people expected the currency to weaken — underscored that managing a currency is a “very difficult thing.”
“I think the lesson they may have learned is negative rates have side effects. They may not achieve the intended objective, and they need a broader range of policy tools than just monetary policy,” Kaplan said.
Kuroda has said rising housing investment is a sign that the negative rate policy is working. However, it also has a lot to do with tax changes, and, ironically, the increasing supply of new homes might drag down Japan’s inflation rate, the opposite of what Kuroda wants.
Speaking in June, Kuroda identified a big expansion in housing for rent as one of the good effects of negative interest rates, the newest tool in the bank’s arsenal, and one that has its fair share of opponents.
“The effect of negative rates is gradually spreading through the real economy, and we’ll see that becoming clearer,” Kuroda said at a news conference in June. “Rental housing has been growing rapidly, but private homes haven’t expanded as much.”
However, the rental market is already weak and more apartments and houses are likely to push down rents more, further hurting inflation.
With more than 10 percent of homes in Japan empty in 2013 and rents falling every month since October 2008, new construction is being introduced into a saturated market. About 34 percent of rental apartments in central Tokyo were vacant in June, according to Kazuyuki Fujii of TAS Real Estate, up from about 30 percent early last year.
The BOJ noted the problem itself in an outlook report last month, saying that “the increase in construction of housing for rent that is motivated by inheritance tax savings has led to a further rise in the already high vacancy rate of housing for rent, and this has generated downward pressure on private housing rent.”
The effect of this on inflation is “not negligible,” the BOJ said in the report.
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