A Bank of Japan board member expressed pessimism about the economy and the central bank’s strategy, saying in a speech Thursday that the BOJ will be unable to reach its 2 percent inflation target as forecast and negative rates will not work to boost investment.
“I believe that it is desirable to aim to achieve the price stability target of 2 percent as a medium-to long-term goal and I expect that the road toward this goal will be long,” Takehiro Sato, one of nine BOJ board members, said in a speech in Kushiro, Hokkaido on Thursday.
Sato dissented on the January decision to adopt a negative-rate policy and also in October 2014, when the BOJ expanded stimulus.
“I believe that the challenge from now on is reforming the policy framework, which is intended to provide solutions in the short term, so as to adapt it to a long-term initiative,” he said Thursday. “The first thing the bank should do for that purpose would be to make the asset purchase operation more flexible.”
Sato’s concerns about reaching the 2 percent price target as forecast echo those of some investors as Gov. Haruhiko Kuroda continues to buy bonds at a record pace and keeps expanding stimulus, yet inflation hovers near zero. Former Deputy Gov. Kazumasa Iwata, who served on the board 2003-2008, has predicted that the BOJ will hit the wall in terms of asset purchases by the middle of 2017.
“There are growing concerns about the sustainability of the BOJ’s easing,” said Daisuke Karakama, chief market economist in Tokyo at Mizuho Bank, a unit of the country’s third-biggest lender. “We can’t see when the BOJ is going to meet the price target and if you take Kuroda’s words at face value, he will have to keep adding stimulus.”
Sato said in the speech that he has concerns about the economy, saying he expects it will “remain sluggish in the future.” He said the economy, “is so fragile as to be liable to post negative growth even because of trivial external factors such as weather conditions.”
Sato cited risks from a negative-rate policy adopted in January because it clashes with the expansion of monetary base target. He also repeated that the BOJ’s bond purchases should be conducted flexibly as he believes it is fine for the bank to fall short of its targeted annual pace of ¥80 trillion increase in bond holdings.
The BOJ has to buy about ¥120 trillion of bonds this year as some bonds mature, which is more than 90 percent of newly issued bonds in Japan’s market. The BOJ held 32 percent of government bonds at the end of December, according to the bank.
“From financial institutions’ recent move to purchase super-long-term bonds in pursuit of tiny positive yield, I detect a vulnerability similar to that seen before the so-called VaR shock in 2003” when Japan’s bond yields surged in the short term, Sato said. A value at risk shock is when markets make a sudden and substantial correction.
Kuroda has reiterated he does not see any limit for BOJ’s bond purchases.
“It is my sincere hope that the bank will conduct monetary policy flexibly under the flexible price stability target while obtaining a better understanding by the market,” Sato said.
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