After a tumultuous 2020, hit by the coronavirus pandemic, the Bank of Japan appears eager to deflect criticism that prolonged monetary easing will do more harm than good and years of pumping money into the economy has done little to boost inflation.
The BOJ's 2 percent inflation goal remains elusive, and there are even fears that the economy will slip back into deflation, a view that Governor Haruhiko Kuroda dismisses.
A moment of reckoning awaits the BOJ in March, when economists will scrutinize the bank's planned disclosure of assessment findings on how to make its policy more effective and sustainable.
The dilemma is that it needs to keep easy monetary policy much longer than previously anticipated while addressing its side effects, including aggressive asset buying that has made the bank the top holder of both government bonds and stocks. Low interest rates have hurt the profitability of financial institutions.
"What monetary easing under Mr. Kuroda has made clear is that injecting money (into the economy) has not caused prices to rise. It's about time to look back on the policy steps that have been deployed and make adjustments," said Yuichi Kodama, fellow chief economist at the Meiji Yasuda Research Institute.
The difficult task for the BOJ is to secure some wiggle room for maneuvering without giving the impression that it is weakening the degree of easing -- or moving toward policy normalization -- when the U.S. Federal Reserve and the European Central Bank are on course to keep their expansionary monetary policies, analysts say.
The BOJ is seen as having little room to ease further despite its pledge to take additional steps when needed. According to Kuroda, the bank will examine whether its operations and policy tools, including asset purchases, have worked as intended.
"It is necessary to be nimble in making effective responses when needed to counter possible changes in economic activity and prices, as well as financial conditions," Kuroda told a meeting of the Japan Business Federation, known as Keidanren, in late December.
A review of the central bank's buying of exchange-traded funds is seen as a likely scenario because it has helped buoy investor sentiment, but critics say the unusual practice for a central bank has distorted stock markets.
Meiji Yasuda's Kodama said the BOJ would want to move toward reducing the amount it buys. Due to the pandemic, the bank has set a 12 trillion yen ($116 billion) annual pace as its upper limit for ETF purchases, while it also pledges to buy at a pace of 6 trillion yen a year "in principle."
"The onus is on the BOJ to consider how to present any change and communicate its intent. If economic conditions are not good, the BOJ can, for instance, remove the limit saying that it is part of further monetary easing. But you cannot use the explanation when the economy is recovering," Kodama said.
When Japan was hit by its initial wave of coronavirus cases and economic activity was depressed in the spring, the bank removed its cap on buying of Japanese government bonds after the actual amount purchased was much smaller than the limit of 80 trillion yen a year.
In recent months, Japan is struggling to cope with record numbers of infections that have increased uncertainty about the economic outlook despite a modest recovery expected by economists.
The BOJ's swollen balance sheet has stoked concerns about its massive asset holdings, which would have to be reduced in future.
The bank has gobbled up Japanese government bonds to keep borrowing costs low and stable under its "yield curve control" scheme and currently owns some 45 percent of the outstanding debt issued by the state.
As of the end of November, it owned ETFs worth about 45 trillion yen in market value, according to an estimate by Shingo Ide, chief equity strategist at the NLI Research Institute. That is roughly 7 percent of the market capitalization of firms listed on the First Section of the Tokyo Stock Exchange.
The 225-issue Nikkei Stock Average ended 2020 at a 30-year high, drawing a sharp contrast with an economy still struggling to return to pre-pandemic levels.
"ETF programs are supporting stock markets at a time when they are flying too high and need a flexible approach," said Martin Schulz, chief policy economist at Fujitsu Ltd. He expects a difficult review on "almost all levels" for the BOJ, which has served as a "policy trendsetter."
As the Japanese economy has seen its inflation rate far below 2 percent for a long time, Schulz said the BOJ can be more effective in providing incentives for growth beyond the pandemic rather than simply aiming at an elusive goal.
Japan's core consumer price index, excluding volatile fresh food prices, dropped 0.9 percent in November from a year earlier, the biggest decline in a decade. According to the BOJ's forecasts, the index will rise 0.4 percent in fiscal 2021 and 0.7 percent in fiscal 2022, still a far cry from 2 percent.
Kuroda has clarified that the bank will not overhaul the current easing framework, under which it maintains short-term interest rates at minus 0.1 percent while guiding long-term rates around zero at present through Japanese government bond-buying. The "yield curve control" program was introduced in 2016 after a comprehensive policy review.
"We do not expect drastic monetary easing that would impact rates or the yen in 2021, as long as private banks' lending standards improve and the currency is stable," said Daiju Aoki, regional chief investment officer for Japan at UBS Wealth Management.
"As part of its review of current policy measures, we think the BOJ will enhance its lending program further, targeting more corporate investment for economic transformation such as digitalization and green investment," Aoki said.