By STEVEN ENGLANDER

The Bank of Japan’s (BoJ) policy meeting on Thursday and Friday is likely to focus on its inability to spark a sustained rise in the inflation rate despite years of negative interest rates and quantitative easing. That emphasis would be missing the point.

The BoJ’s big problem is that its policies have effectively forced Japanese investors out of bonds and into equities, which are now tanking, and that it has not been able to fix the damage done to banks by negative rates. The Topix Index is off 13% since the January peak, and Japanese banks have underperformed the broad index by almost 20% since the end of 2015.

The good news is that investors are probably wrong in sensing that the BoJ might be shifting into a hawkish mode. That course of action would do more harm than good because it would strengthen the yen, and there wouldn’t be an offsetting benefit.

The BoJ has an inflation target, so it’s natural that it measures monetary policy success in inflation terms. However, most major central banks have failed to reach their inflation marks. Nonetheless, economic performance has been strong globally in recent years. If the inflation process makes it difficult to hit the inflation target, all the central bank can do is keep trying.

Still, no one forced the BoJ to pursue negative rates in early 2016. That decision was based on the central bank’s view that it would be a way of providing additional stimulus. But forcing investors out of bonds and cheerleading them into equities is fine when equities are rising, but not when they are falling.

The Topix Index of bank shares has dropped 10% since the end of 2015, while the broader Topix Index has risen 13%. That makes it hard to argue that negative rates are beneficial. Japan’s 20-year government bond yields are 75 basis points (bps) higher than one-year yields, down from a spread of about 100bps before the move into negative rates. Borrow short, lending long is not very profitable for banks.

Compared to the rest of the Topix, Japanese banks are very close to their lows of the first quarter of 2016. There are two reasons for this weakness. The first has to do with translation effects, or the way companies report the effects of changes in exchange rates. Although the yen’s strength isn’t to blame for all the problems with Japanese banks, there is a close enough relationship between the currency and the Topix that it bears some responsibility.

The second reason is, since 2017, Japanese banks have become more sensitive to interest rates. Figure 3 shows the relative performance of Topix, banks and Japanese five-year yields, but the dynamic applies to all maturities. The relationship is pretty tight.

Japanese equities overall are largely driven by global sentiment and the yen. Figure 4 shows the actual and estimated level for the Topix based on a