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Economy

Monetary policy -- Japan's next Trump-induced headache

The last time the US stuck its nose in the BOJ, the 1980s party ended

Bank of Japan Gov. Haruhiko Kuroda at a press conference on Jan. 31.

TOKYO -- Speculation is growing over whether or how U.S. President Donald Trump will address the Bank of Japan's monetary policy when he meets Japanese Prime Minister Shinzo Abe on Feb. 10. 

The central bank's strategy is aimed at clearing its price stability target as early as possible rather than stabilizing the yen's exchange rates, BOJ Gov. Haruhiko Kuroda said at a news conference on Tuesday. Kuroda thus stressed anew that the BOJ's policy of keeping long-term interest rates near zero does not infringe on an international accord to avoid currency devaluation because it is designed for the domestic purpose of pulling Japan out of deflation.

But as the BOJ's easy-money policy undeniably helps weaken the yen, Japanese government officials are increasingly concerned that Trump will take issue with it during his meeting with Abe. The new U.S. leader has already complained about Japan's trade surplus with the U.S.

Trump's stance on the BOJ's monetary policy is drawing keen attention not only because he is expected to pursue a bilateral trade accord between Japan and the U.S., but also because he has mentioned the introduction of tough restrictions on yen-weakening measures during negotiations for the trade deal. 

Battling deflation

The BOJ introduced a new quantitative and qualitative credit-easing regime to keep long-term rates low. The policy tends to put the yen under selling pressure from the perspective of interest rates.

In fact, the yen has fallen sharply in value since last November due to widened spreads in interest rates between Japan and the U.S., where long-term rates have risen on expectations that Trump's economic policy, such as huge tax cuts, will strongly stimulate the U.S. economy. The Japanese government is concerned that the Trump administration will take aim at such a consequence.

The BOJ has continued to deny that its monetary policy is aimed at devaluing the yen, maintaining that it is for the domestic purpose of ending Japan's deflation and thus does not violate the currency accord set by the Group of 20 major economies.

In addition, the U.S. is not in a position to criticize the BOJ as the U.S. Federal Reserve introduced a massive asset-purchasing program or quantitative easing to address the global financial crisis that began in 2008, resulting in the dollar's deprecation.

But it is unclear whether the Trump administration understands such common sense.

Japan will find itself in deep trouble in its quest to beat deflation if Trump takes up the BOJ's policy in bilateral negotiations. 

It's deja vu all over again

Trade negotiations usually discuss opening markets for individual industries rather than macroeconomic issues. There have been cases of the U.S. applying external pressure on macroeconomic policy in the past. 

Among them was the Japan-U.S. Structural Impediments Initiative, which was implemented from 1989 to 1990. The plan went so far as to discuss Japan's structure to address the trade imbalance between the two countries.

Even Japan's fiscal policy was addressed. Washington urged Tokyo to boost public works spending, saying that Japan should stimulate domestic demand through increased investment in public works projects so as to expand imports for the sake of correcting its huge trade surplus with the U.S. 

With the U.S. stepping into Japan's fiscal policy, the Finance Ministry's budget bureau was thrown into chaos and eventually worked out 10-year public investment plan totaling 430 trillion yen ($3.82 trillion at the current exchange rate).

Although the independence of monetary policy from politics is given lip service, the U.S. government exerted external pressure on the BOJ in the 1980s. At that time, the BOJ was forced to keep long-term interest rates low for an extended period in order to contribute to international cooperation aimed at stabilizing the dollar's value. This had an effect on a speculative bubble swelling for land and other asset prices. 

The bubble burst in the 1990s, wreaking havoc on the Japanese economy. 

Will the BOJ's monetary policy be subjected to pressure from the Trump administration?

Kuroda denies that the yen-dollar exchange rates are determined only by spreads in interest rates between the two countries. But everyone should prepare for the effects of Trump's stance on the market. 

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