It was hailed as the boldest of actions yet in the modern monetary policy sphere. Nevertheless, it raised apprehensions across the globe. Will it work? Or, will it spell doom? Even as the debate rages, one thing, however, is clear. Haruhiko Kuroda, the new Governor of Bank of Japan, has put all eggs in one basket, and given a new twist and meaning to the war against recession.

On April 4, Mr. Kuroda-piloted Bank of Japan (BOJ) announced a $1.4-trillion stimulus booster to wake up the Japanese economy, which has slipped into a deep slumber. The two-year emergency stimulus operation will ensure BOJ buys bonds worth $78.6 billion a month. The ‘Operation Revival’ will see the monetary base, and the amounts outstanding of Japanese Government bonds as well as exchange-traded funds double in two years. Significantly, it has said that Japanese Government bonds with all maturities, including 40-year ones, will be eligible for purchase.

Mr. Kuroda has indeed re-defined the monetary course, and, in the process, taken a gigantic risk in aiming for a two per cent inflation target in two years. BOJ has given interest rate, one of the tested tools in monetary management, a long vacation, and instead embraced base money approach fully.

The immediate-term saw the Japanese yen slide, and stocks surge. The entire script was indeed played out to perfection, especially since the return to power of Prime Minister Shinzo Abe on the back of a liberal promise to jump-start the economy.

The BOJ move has cross-border implications. Will it trigger a currency war? Will it set off competitive measures among the Asian countries to retain attraction to their products in the global market place? As analysts across the globe break their heads over the fall-out of BOJ action on other economies, nearer home, it is bound to have demonstration effect. For rate cut protagonists in India, BOJ has given them fresh fodder to take on the Reserve Bank of India (RBI) which has come under intense criticism from across the canvass for its strident stance. With the apex bank slated to announce its annual monetary policy on May 3, pro-rate cut voices are bound to reach a crescendo.

Coming as it does after the Union Budget (perhaps the last one under the UPA II regime), the ensuing annual policy of the RBI has already raised quite a lot of expectations. These expectations aren’t quite easy to shrug off. While the deceleration continues, assorted factors are pushing costs, and keeping the inflation still at a disconcertingly high level.

Other key economic numbers such as the current account deficit (CAD) and fiscal deficit are anything but encouraging. What has surprised the policy-makers and others alike is the fact that the monetary transmission has not really happened even after the two-phase 75 basis point policy rate cut effected by the apex bank in the last one year on top of CRR (cash reserve ratio) reduction. Ironically, we see banks indulge in competitive wooing of savings by individuals by raising deposit rates. A section of the bankers have been vociferously articulating for the phase-out of CRR (which is a portion of non-interest yielding deposits which banks are required to maintain with the RBI). The RBI has come under severe flak for its blinkered horse-like focus on inflation, hurting the growth cause in the process. It is against this backdrop that an influential section of the economy has begun pushing the ‘new normal’ theory, and demanded the Reserve Bank to lower the inflation goal. Governor D. Subbarao pooh-poohed this suggestion, and demolished this ‘new normal’ argument at a Bankers’ Club meeting in the capital recently.

The interest rate has already become an intense topic of discussion even at the micro level. With the general election round the corner and economy decelerating fast, the discussion is now increasingly turning out to be an angry war of words between the monetary mandarins and political bosses. Coming as it does against this hazy home setting, the Bank of Japan action, to go in for a massive money plan to jump-start the economy, is bound to have reverberations in India too. Many have argued that interest rate is not the lone tool to manage the monetary economy. So saying, they have dismissed the excessive focus on the interest rate. Rate cut protagonists, however, have turned this argument around. If it is not the tool, why should the RBI keep excessive focus on it? Well, the debate is escalating. And, the RBI has a tough job on hand.

jagannathan.kt@thehindu.co.in

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