Baby-boomers will start turning 75 or older in 2022, which is expected to trigger a surge in health care and nursing care costs.
Baby-boomers will start turning 75 or older in 2022, which is expected to trigger a surge in health care and nursing care costs.

BoJ Faces Tougher Road to Future Normalization

The BoJ now controls roughly 40% of all JGBs—a share 3.4 times bigger than in December 2012, before it embarked on its qualitative and quantitative monetary easing

BoJ Faces Tougher Road to Future Normalization

Amid stalling inflation and ballooning government spending, the Japanese government is growing more dependent on the Bank of Japan's colossal monetary easing policy engineered by Governor Haruhiko Kuroda.
The government's nomination of Kuroda to another five-year term Friday signals that his stimulus campaign will continue for the time being, Nikkei reported. 
In addition to Kuroda, Tokyo also chose Waseda University professor Masazumi Wakatabe and BoJ Executive Director Masayoshi Amamiya to take over as deputy governors in March.
The BoJ now controls roughly 40% of all Japanese government bonds—a share 3.4 times bigger than in December 2012, before it embarked on its qualitative and quantitative monetary easing. From taking over almost half the JGB market to defying convention by introducing negative interest rates, the bank has pursued some of the most drastic policies in its nearly 140-year history under Kuroda.
Macroeconomic conditions have improved significantly since. The Nikkei Stock Average has doubled on better corporate performance. Unemployment has dropped to 2.8% from 4.3%, putting Japan at full employment. Overseas growth has also helped, but monetary easing is undeniably a key driver for the country's second-longest economic recovery since World War II.

Relying on Monetary Easing
Meanwhile, the ruling Liberal Democratic Party and the government have become increasingly reliant on monetary easing. Pledging to bring Japan out of deflation, Prime Minister Shinzo Abe postponed a planned consumption tax hike twice while ramping up government spending. The national debt has grown by roughly 160 trillion yen ($1.5 trillion) in the last five years. Tokyo keeps expanding its budget without tackling reforms for a social security program under pressure from an aging population.
The BoJ's next governor and deputy governors will serve until 2023. Baby-boomers will start turning 75 or older in 2022, which is expected to trigger a surge in health care and nursing care costs. Should interest rates rise, debt repayment will overtake welfare as Tokyo's biggest expense in the mid-2020s. The central bank cannot taper monetary easing even if it wanted to without medium- to long-term improvement in fiscal health.

Cutting Corporate Taxes
In an attempt to bolster economic growth, Tokyo has cut corporate taxes and set up strategic zones with eased regulations. But it has seen little results. Political inertia even in the face of ineffective economic policies is one unfortunate side-effect of Kuroda's policies. Initially intended as a short-term boost, large-scale easing is now entering its sixth year.
However, the BoJ's exit from monetary easing would not just impact the Japanese stock market, propped up by the bank's nearly six trillion yen annual purchase of exchange-traded funds. Many investors in Japan, the US and Europe put their cash into emerging economies amid low interest rates at home. But if the US and Europe normalize their monetary policy before Japan, "emerging economies could grow more dependent on monetary easing by the BoJ," said Yuji Shimanaka at Mitsubishi UFJ Morgan Stanley Securities.
Japan's monetary policy is expected to remain steady for the foreseeable future. But inflation is still at 0.9% and the yen has also strengthened by three to the 105 range against the dollar in the last week alone. An even stronger yen could pose an obstacle to Japan's escape from deflation.

Ultra Cheap Interest Rate 
After two years of the Bank of Japan guiding key interest rates into negative territory, lenders here have seen loan rates slide toward zero, pushing financial institutions to reassess their business models. 
Japanese banks had 471 trillion yen ($4.42 trillion) in loans outstanding at the end of 2017, up 6% from two years earlier. The BoJ imposed negative rates in February 2016 on certain deposits held at the central bank, aiming to spur lending and encourage businesses to borrow more money for expansion and investment. 
But roughly 290 trillion yen of those loans—62% of the total—carry interest rates of less than 1%. Only 10% have rates of 2% or more, down five percentage points from the end of 2015, as businesses and individual borrowers have refinanced to lock in more preferable terms. 
Real estate financing has played a larger role in the increase in lending than loans to businesses. Over half of listed companies are effectively debt-free, and "demand for financing is not particularly strong," according to a senior official at one of Japan's top banks.

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