Financial Costs Constrain the Bank of Japan’s Monetary Policy

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Bloomberg Economics’ Bank of Japan Policy Condition Index suggests that the forces toward either easing or tightening policy are more or less balanced now. Yet adjusted for financial imbalances, the picture changes -- a slightly tighter stance is warranted when taking into account the financial costs of the BOJ’s policy. This analysis shows why the BOJ is in a holding pattern, even with inflation at less than half its 2% target.