In response to mounting criticism from the country's financial institutions, the Bank of Japan is adjusting its quantitative and qualitative easing program. On Sept. 21, the central bank announced that it would shift its focus away from expanding the monetary supply and toward managing the yield curve of Japanese government bonds. To that end, the bank has scrapped its deadline for reaching an inflation target of 2 percent and will instead keep pumping more money into the economy until inflation exceeds that amount. Meanwhile, the Bank of Japan will still attempt to buy 80 trillion yen ($794 billion) worth of assets each year. However, it will adjust its short-term purchases to reshape the bond yield curve.
The bank's move comes amid pushback to its previous policies from Japan's financial institutions. Under the former quantitative and qualitative easing program, which extended bonds' average maturity length and led to negative interest rates, the bond yield curve flattened out, cutting deeply into financial firms' profits. By comparison, the bank's new program is intended to maintain stimulus levels while focusing on steepening the yield curve — to the extent that the central bank can influence it — to appease dissatisfied companies.
The bank is grappling with its own lingering concerns about the efficacy and sustainability of its quantitative easing program as well. Falling food and energy prices pushed Japan's consumer price index below zero in five of the first seven months of this year. But even aside from the effects of low prices and a 2014 tax hike, inflation has barely risen above 1 percent, and in July it dropped sharply to just 0.5 percent. Yet the bank, which already owns nearly 40 percent of outstanding government bonds, may be nearing the limits of its long-standing approach to purchasing assets. Its recent policy reassessment may therefore be the start of a longer-term, managed retreat from the Bank of Japan's traditional tactic of trying to jumpstart the economy by buying up government bonds.