KOFU, YAMANASHI PREF. – Bank of Japan board member Yutaka Harada said on Wednesday the central bank must ramp up stimulus without delay if risks to the economy threaten achievement of its inflation target.
Harada, a vocal advocate of aggressive monetary easing, said the nation’s economy was facing growing risks, including from slowing demand in China, simmering trade tensions, volatile stock price moves and weak private consumption.
Subdued inflation could heighten views among the public that prices won’t rise much and delay the realization of the BOJ’s 2 percent inflation target, he added.
“If the economy deteriorates to the extent that achieving the inflation target in the long term becomes difficult, it’s necessary to strengthen monetary easing without delay,” Harada said in a speech to business leaders in Kofu.
A scheduled sales tax hike in October could also hurt the economy and push down prices by weakening demand, he said.
The BOJ faces a dilemma. Years of heavy money printing have dried up market liquidity and hurt commercial banks’ profits, stoking concern over the rising risks of prolonged easing.
And yet, subdued inflation has left the BOJ well behind its U.S. and European counterparts in dialing back its crisis-mode policies, leaving it with little ammunition to battle any abrupt yen spike that could derail an export-driven economic recovery.
Faced with the need to address the rising cost of easing, the BOJ decided last July to allow long-term bond yields to move more flexibly around its zero percent target.
To reassure markets that monetary policy will remain loose, it also adopted a new forward guidance pledging to keep rates at very low levels for an “extended period of time.”
Harada said he dissented to the July decision on the view the BOJ should commit to keeping rates low “unless prices show stronger movements than currently anticipated,” rather than to the vague time frame.
“It’s my view that the conduct of monetary policy should be data-dependent, not calendar-based,” he said, adding that doing so would make the BOJ’s forward guidance more powerful.
The BOJ’s nine-member board is split between those like Harada, who sees room to ramp up stimulus, and those who fret about the dangers of protracted easing policy.
Harada dismissed calls from financial institutions that the BOJ should raise rates to ease the strain on their profits, saying that withdrawing stimulus now would backfire by hurting the economy and dampening corporate fund demand.
“Past episodes of premature monetary tightening worsened the economy, drove down prices and output, and led to declines in interest rates in the longer-term,” Harada said.
“Premature tightening was thus part of the reason behind the current difficulties the financial industry faces.”
Under a policy dubbed yield curve control, the BOJ aims to guide short-term rates at minus 0.1 percent and the 10-year government bond yield around zero percent.