Bank of Japan Gov. Masaru Hayami on Wednesday explained the central bank’s wait-and-see attitude in its recent monetary policy decision, ruling out the possibility of further lowering the official discount rate or pursuing an inflationary policy to help revive the economy.
In a speech before a business society in Tokyo, Hayami reiterated that resuscitating the ailing financial system and reviving stagnant business conditions are two urgent problems that must be resolved concurrently.
“In order to solve financial institutions’ bad loan problems, the economy itself must be stabilized,” he said. “Since business conditions and the financial system are deeply woven together, weakness in the former may worsen the latter and vice versa.”
The BOJ’s Policy Board decided on Tuesday to keep its easy monetary policy unchanged by maintaining the official discount rate at a historic low of 0.5 percent. Hayami explained that the policy board’s decision is based on the central bank’s prediction that the government’s comprehensive economic stimulus package will likely take effect in the fall. “It is our position to closely watch how the government’s economic and financial policies will affect the confidence of companies and households,” he said.
Hayami said it is difficult for the BOJ to further cut the key interest rate to promote an easier flow of money since the rate is already so low. “Under the present situation, an additional cut in the official discount rate may decrease interest income and weaken consumers’ buying incentives,” he said. “Also, a lower interest rate would promote the depreciation of the yen, which may affect other Asian currencies.”
Hayami also rejected an inflationary policy to help the economy, saying the BOJ’s goal was to ensure price stability and strive for an economic situation that is neither deflationary nor inflationary. “Fiscal policies, instead of monetary ones, should play a major role in creating demand,” he said.
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