Business

Economists worry over BOJ's next step

by Tomoyuki Tachikawa

Kyodo

Amid speculation the Bank of Japan will announce additional monetary easing next week, some observers are warning of possible side effects.

A long way from hitting its 2 percent inflation goal, the BOJ may expand its radical negative interest rate policy and modify its asset-purchasing program in a bid to galvanize domestic demand by driving down lending rates, said sources familiar with the bank’s thinking.

But economists have warned that these steps risk disturbing the normal functioning of the economy and the financial system, as the BOJ has already eased its monetary grip to unprecedented levels since Gov. Haruhiko Kuroda took office in March 2013.

Of course, the BOJ might stand pat at its two-day Policy Board meeting through next Wednesday. It said in July that it would conduct a “comprehensive assessment” of the aggressive monetary easing policies it has undertaken for more than three years.

Consumer prices fell at their fastest in more than three years in July, down 0.5 percent from a year earlier, a far cry from the lofty 2 percent inflation goal.

“There is still ample room for further cuts in the negative interest rate and for an increase in the quantity dimension,” Kuroda said in a speech on Sept. 5.

BOJ Deputy Gov. Hiroshi Nakaso echoed that view, saying on Sept. 8 that the negative interest rate policy has been shown to work.

Both, however, referred to adverse effects for the first time since the bank adopted the measure in January, as many corporate executives have argued the BOJ’s policy has drastically lowered longer-term interest rates, sapping profits in the banking sector and hurting returns for insurers and pension savers.

The yield on the bellwether 10-year Japanese government bond has recently stayed around minus 0.050 percent, after plunging to a record low of minus 0.300 percent in late July.

To compensate for their losses, life insurers might lift prices of savings-based products and banks would increase charges on depositors, which could deal a blow to consumers.

Japanese Bankers Association Chairman Takeshi Kunibe told a news conference Thursday that if interest rates fall further, that would “produce more side effects than positive ones.”

Brushing aside such criticism, the BOJ is likely to tweak the framework of its bond buying program to curb falls in longer-term interest rates by focusing on buying shorter-term bonds while retaining an annual target of ¥80 trillion in JGB purchases, the sources said. Interest rates move inversely to bond prices.

“This is not a good idea,” a debt dealer at a securities firm said. “The idea may help financial institutions make returns, but it would push up longer-term interest rates and pose a downside risk to economic activities such as investment and consumption.”

Amid growing concerns over the side effects of any doubling down by the BOJ, Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp., said central banks in developed economies are “in a situation where they stop to assess the effects and prospects of the policies” they have carried out since the global financial crisis in 2008.

For example, the European Central Bank has kept its negative interest policy and asset-buying program unchanged, even though Britain’s vote in late June to leave the European Union darkened the outlook for the eurozone economy and rattled the market, she said.

Instead of bolstering monetary easing soon, the BOJ may take a wait-and-see attitude to consider how to respond to emergencies that cannot be solved by monetary policy under the current framework, Yamashita said.

Takuji Aida, chief economist at Societe Generale Securities, has a different reason for expecting the BOJ to take no action at the next meeting.

The central bank has attributed its failure to achieve the inflation goal mainly to lower global oil prices and slower growth in domestic demand.

In recent months, oil prices have hit bottom and private spending, which accounts for roughly 60 percent of Japan’s gross domestic product, has shown signs of recovering after the 3-point consumption tax hike to 8 percent in 2014.

As a result of its comprehensive policy assessment, the BOJ may “conclude its monetary easing measures will produce positive effects ahead,” Aida said.

Should the BOJ make such a judgment, the bank would postpone additional monetary easing, he added.

Although there is speculation the central bank may start to buy foreign bonds, many analysts say the BOJ won’t do that, given that Japanese law prohibits the bank from buying foreign debt to manipulate exchange rates.

At the previous policy meeting ended July 29, the BOJ decided to almost double its purchases of exchange-traded funds to an annual pace of about ¥6 trillion from around ¥3.3 trillion.

But the bank maintained its existing program to boost the monetary base by ¥80 trillion a year through the asset-purchase program and left unchanged its minus 0.1 percent charge on some reserves held by financial institutions at the BOJ.