Former White House economist warns against hasty BOJ policy shift

by Yoichi Kosukegawa

Kyodo News

Glenn Hubbard, former chairman of the U.S. Council of Economic Advisers, said the Bank of Japan should exercise caution when ending its ultraeasy monetary policy because inflation is barely existent.

“Inflation is still modest. It’s about half a percent in the last forecast,” Hubbard said. “That’s, to me, still dangerously low.”

Hubbard made the comments in an interview in Tokyo with the media Tuesday, a day before the BOJ began its two-day Policy Board meeting.

“We are talking about removing the quantitative easing policy . . . I think any exit from this monetary policy should be slow and gradual until inflation gets up to a more comfortable range” of between 1 percent and 2 percent, said Hubbard, now dean of the Columbia University Graduate School of Business.

Hubbard, who served as chairman of the White House Council of Economic Advisers between 2001 and 2003, said an inflation rate of 0.5 percent means there is a risk the Japanese economy could drop back into deflation.

Speculation is growing that the BOJ Policy Board will decide to finally end its quantitative monetary easing policy Thursday. The policy has been in place for five years.

Under quantitative easing, the BOJ floods the market with liquidity to anchor short-term interest rates near zero. It does this by raising the balance of current accounts held by commercial banks at the central bank, instead of the overnight call money rate.

Hubbard also said the BOJ needs to show “more clear inflation objectives” when it ends quantitative easing so that financial markets can expect a subsequent BOJ monetary action to curb a rapid rise in interest rates.

“Once the exit has started, care has to be given to what is communications strategy of where you are headed,” he said.

Even if Japan does end the quantitative easing policy soon, there will be basically no change in the strong dollar trend because the U.S. Federal Reserve is expected to continue its credit-tightening campaign, Hubbard said.

He said he expects the Fed to raise the U.S. federal funds rate to as high as 5.25 percent. The key short-term rate stands at 4.50 percent.

Hubbard said Japan should avoid increasing the consumption tax in the near future to help finance the huge budget deficit.

“I don’t think Japan should be headed toward a significant tax increase at the present,” he said. Japan’s economic recovery is “real but young,” and its monetary policy is about to become “less accommodative,” Hubbard said.

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