[TOKYO] A small omission in a Bank of Japan report on its radical monetary stimulus programme signals that some central bank leaders are concerned it is not working as expected, potentially laying the grounds for a rethink of its policy framework.
A shake-up of that framework is not on the near-term horizon, but board debate over the programme's feasibility may heat up as slowing inflation puts the BOJ's credibility on the line.
Under the massive money-printing experiment launched in April 2013, the BOJ targets base money - cash and deposits at the central bank - on hopes the wall of money it pumps out spurs expectations of price rises and nudges consumers to spend more now rather than save.
Instead, consumers have slashed spending, initially due to last year's sales tax hike and more recently as weakness in the yen, triggered partly by the BOJ's easing, pushed up import costs and grocery prices.
With inflation grinding to a halt, putting its credibility on the line, the BOJ this month released for the first time a research paper analyzing the effects of its radical stimulus, dubbed quantitative and qualitative easing (QQE).
The paper defended QQE as pushing down real interest rates by 1 percentage point and lifting inflation by 0.6 point.
But it made no mention of how much the expansion of base money heightened inflation expectations, skirting a crucial question about QQE effectiveness.
BOJ officials say they did not offer any calculations since it was too difficult to measure inflation expectations. But it suggests the board isn't eye-to-eye on the psychological effect of QQE, said sources familiar with the BOJ's thinking. "It's a sticky issue," one said.
To be sure, QQE helped weaken the yen by nearly 25 per cent against the dollar, boosting revenue at big manufacturers and prompting them to raise base pay for two straight years.
But the massive money printing has not spurred cautious consumers and companies to jack up spending.
A government index measuring a broad trend of consumption remains below levels hit immediately after QQE's launch. "Last year was a perfect example of how sensitive Japanese households were to price rises," said one person familiar with the BOJ's thinking.
Governor Haruhiko Kuroda said last week he was more convinced than ever about QQE's success, calling it as powerful as cutting interest rates 10 times.
He is likely to reiterate that confidence after a two-day rate review - where the BOJ is likely to keep policy settings unchanged - ends on Friday.
But others in the board are less sure, sensing diminishing returns from QQE and rising costs such as distorted market functions and drying-up of bond market liquidity.
A slowdown in inflation has also forced the BOJ to redefine a two-year timeframe for hitting its target, which could dilute the psychological impact of its stimulus.
Two years ago, Mr Kuroda said the deadline was critical to maximising the impact of QQE and that he won't make excuses for failing to deliver. Now, the BOJ says the timeframe is a loose commitment and different from its forecasts, which are swayed by factors like oil moves.
The median forecast of the nine-member board is for Japan to hit 2 per cent inflation by around September next year. But at least three members feel it will take longer.
Mr Kuroda has no intention of ditching the two-year timeframe or the base money target, and will prefer expanding stimulus again if needed, people familiar with BOJ thinking say.
But uneasiness within the board on QQE, which relies heavily on the elusive effect on sentiment, is rising and may spur debate of an alternative framework, they say.
"The BOJ would either have to ditch the two-year timeframe or ease policy again - or do both," said Izuru Kato, a prominent central bank watcher who's chief economist at Totan Research.
"Either way, it's in a tough spot. If it tries to be candid about the effect of QQE, it will have to admit that expanding base money had barely no effect in lifting expectations."