The Bank of Japan should stop its record bond purchases because the policy has failed to spur consumer prices and instead focus with the government on a wage target, according to a former central banker.
While BOJ Gov. Haruhiko Kuroda’s asset purchases and negative interest rate policy have dragged down the benchmark 10-year Japanese government bond yield to as low as minus 0.3 percent last month, inflation is back where it was before he began his easing program 3½ years ago. Central bank purchases have sapped sovereign-note liquidity and driven volatility to the highest level since 1999.
“The lesson of the mistakes of the past three years is that just increasing the volume of money won’t break the norm of prices,” said Tsutomu Watanabe, who worked at the BOJ from 1982 to 1999 and now teaches at the University of Tokyo. The government should raise the minimum wage, boost civil servant salaries and charge more for its services, he said.
While Kuroda has said his easing program is helping the economy, he also ordered the board to review the efficacy of the policy at its next meeting in September. The BOJ isn’t short on suggestions. The International Monetary Fund is urging the country to resurrect the type of incomes policy once employed by former U.S. Presidents Richard Nixon, Gerald Ford and Jimmy Carter. Japan’s main opposition force, the Democratic Party, has called for an end to negative rates, saying it damages the functioning of financial markets.
“Due to the massive purchases of JGBs, I feel that the fiscal discipline of the authorities is loosening,” Watanabe said. “Eventually, you can’t rule out that this is going to invite a financial crisis.”
The central bank should stop increasing its holding of bonds and keep them at the same level, according to Watanabe. While that might unsettle debt investors, it won’t lead to a spike in yields as the BOJ controls some interest rates directly, he said.
Instead, what the bank should do is say it’s targeting wage gains of 4 percent a year — 2 percent inflation and 2 percent productivity gains, Watanabe said.
Wages rose 0.2 percent in the fiscal year through the end of March, and haven’t increased more than 0.7 percent in any year back through at least 2003.
Increases by the government of both public sector wages and the cost of services will create an expectation of inflation and allow private companies to also raise their prices, helping boost salaries, Watanabe said.
The IMF wants Japan to use moral suasion, tax breaks and, as a last resort, penalties to prod companies into granting bigger pay gains.
“We need policies to support wage increases in Japan,” Luc Everaert, IMF mission chief for the country, told reporters on Aug. 2.
While the yen has strengthened this year, it’s still fallen 8 percent since right before Kuroda’s stimulus began in April 2013. The Topix share index has jumped 30 percent during the period.
“The unprecedented stimulus did have an effect in terms of weakening the yen and boosting share prices,” Watanabe said. “It affected financial markets, but the impact didn’t spread from banks to the real economy.”
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