Drop base money goal to regain market's trust, ex-BOJ economist says

by Chikako Mogi and Masahiro Hidaka


The Bank of Japan risks losing the confidence of investors by sticking to a bond-buying plan that is failing to drive inflation to its goal, says a former chief economist at the central bank.

“It wouldn’t be sustainable” to buy government debt at a faster pace to spur consumer prices, Hideo Hayakawa said in an interview.

As bond purchases are the only way to boost base money at an annual pace of ¥80 trillion ($668 billion), the BOJ should scrap the policy. That would allow it to use other tools, including lowering the rate it pays on reserves, said Hayakawa, who spent most of his career under Gov. Haruhiko Kuroda’s predecessors.

Kuroda has batted away any suggestions the BOJ faces constraints in soaking up bonds, even as traders say falling liquidity is driving up volatility in the world’s second-biggest sovereign debt market. With inflation stalling, the BOJ on April 30 pushed back its time frame for reaching its 2 percent target, a goal Kuroda sought to reach in about two years when he launched the unprecedented asset-purchasing program in April 2013.

“Committing to the monetary base target is restricting the BOJ’s policy options,” Hayakawa said in Tokyo last week. “While I don’t think there is any imminent need for further easing, a central bank must retain a free hand to deal with unforeseen external developments. A central bank needs always to own the cards. But as a result of committing to the monetary base target, the BOJ is running out of cards.”

Hayakawa, 60, was a BOJ executive director until March 2013 and is now a senior executive fellow at Fujitsu Research Institute. He has been a vocal critic of Kuroda’s policies.

Inflation as measured by the BOJ’s main gauge disappeared in February, pressured by the rout in oil prices, before picking up to 0.2 percent in March — one-tenth its target.

The BOJ kept its easing program unchanged at its April 30 Policy Board meeting, even as it cut its inflation outlook and pushed back the time frame for its target to the half-year through September 2016 from around the year through March. At the same time, Kuroda stuck to a pledge to achieve the goal as soon as possible, within a period of about two years.

The BOJ may find it harder to buy bonds as supply tightens in the secondary market, according to Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities Co.

The central bank has room to buy all new bonds issued by the Finance Ministry after Kuroda unexpectedly led a divided Policy Board to expand monetary easing in October. At the same time, financial institutions must hold a certain amount of sovereign debt in their portfolios as collateral even as yields drop.

“Targeting the monetary base leaves JGBs as the only tool,” Hayakawa said. “The BOJ can’t increase the amount of JGBs it purchases each month. The BOJ says it could, but even if it did, it would only be possible for a year at most.”

The BOJ could instead pursue other means to reflate the world’s third-biggest economy, including buying debt backed by the central government as well as regional government debt, Hayakawa said. It could also increase purchases of exchange-traded funds and expand special lending programs, he said.

Kuroda said in a January interview that the BOJ may need to get creative in any further monetary stimulus. After the board meeting on April 30, he said a tightening supply-demand balance and rising inflation expectations would help drive consumer price gains toward the BOJ’s goal.

While economic growth is sluggish, deflationary pressures are in retreat and Japan is slowly moving toward the 2 percent inflation goal, Hayakawa said.

“The unreasonable two-year time frame should be dropped and the BOJ should just take its time to reach the goal,” he said. “That’s the view of the general public, which I think sees no need for further easing and no problem if 2 percent isn’t hit.”

It’s a different story for market players, Hayakawa said.

Many investors were caught off guard on Oct. 31 when the BOJ unexpectedly increased monetary stimulus to stamp out a “deflationary mindset” and keep prices on track toward its target.

The central bank prompted some BOJ watchers to reassess their views after its April 30 decision, with economists from JPMorgan Chase & Co. to Goldman Sachs Group Inc. pushing back their calls for additional stimulus.

The BOJ is creating mistrust in the market, Hayakawa said.

“It must come up with an explanation by October at the latest and reconstruct dialog with markets. Otherwise, when the time comes for an exit, markets can retaliate with confusion and rebellion.”

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