BOJ has done too little, says contender

by Mayumi Otsuma

Bloomberg

The Bank of Japan has failed to end more than a decade of deflation by being too cautious, according to Takatoshi Ito, a former Finance Ministry official who is a contender to become the central bank’s next governor.

The BOJ Policy Board under Gov. Masaaki Shirakawa, who will step down in April, has done “too little, too late,” Ito, dean of the University of Tokyo’s Graduate School of Public Policy, said Thursday in Tokyo.

The BOJ should have started its asset purchase program earlier, and it has been “extremely passive in building inflation expectations,” he said.

Ito’s criticism of the central bank echoes that of Shinzo Abe, whose Liberal Democratic Party is leading in polls to win the Dec. 16 Lower House election. Abe’s call for the bank to introduce unlimited easing and set an inflation target of 2 percent sent the yen to a seven-month low last month.

“Inflation targeting will become a very important element” to stamp out deflation, Ito, 62, said. “It’s worth trying to pull Japan out of a deflationary spiral that has lasted 15 years.”

The yen has weakened around 1.4 percent against the dollar since Abe’s remarks in November, the most performance among 16 major currencies tracked by Bloomberg. Ito described the development as positive.

Ito was nominated for BOJ deputy governor in 2008 by the then-ruling LDP. However, his candidacy was rejected by the opposition-controlled Upper House, along with two nominees for governor who, like Ito, had previously worked as Finance Ministry officials. Ito served as deputy vice finance minister from 1999 to 2001.

The BOJ’s fund to purchase government assets and other securities — its main policy tool for combatting near-zero interest rates — should have been introduced in 2008 instead of two years later to help the economy deal with the global financial crisis, Ito argued.

The BOJ increased the size of the fund by ¥11 trillion to some ¥66 trillion Oct. 30, in a rare second straight round of monetary easing in two months. The central bank set an inflation target of 1 percent in February and has pledged “aggressive” easing until the goal is in sight.

But Ito said the government and the BOJ should establish an inflation target in writing, adding, “there’s no need to revise the law (to do this).”

In its campaign platform for the upcoming general election, the LDP proposed establishing a joint fund among the central bank, the Finance Ministry and the private sector to acquire foreign bonds in a bid to defeat deflation and weaken the yen, without elaborating.

“The BOJ can and should buy foreign bonds,” especially from issuers such as the European Financial Stability Facility, Ito said, a move, he added, that would be entirely possible if the finance minister publicly declared support for such purchases.

In addition to the end of Shirakawa’s term in April, his two deputy governors, Hirohide Yamaguchi and Kiyohiko Nishimura, will exit in March.

With two former private-sector economists on the bank’s nine-member Policy Board, Takehiro Sato and Takahide Kiuchi, showing signs of favoring more stimulus, a new government has the chance to install a majority in favor of monetary easing on the policymaking panel.

Ito has been mentioned as a potential candidate for BOJ governor by economists, including Koichi Hamada, a retired Yale University economics professor who taught Shirakawa at the University of Tokyo, and Masamichi Adachi, a senior economist at JPMorgan Securities Japan Co. in Tokyo and a former BOJ official.