The Bank of Japan has nearly exhausted its policy ammunition for boosting the economy, as deepening negative interest rates — seen as the most likely step if it were to expand stimulus — will do more harm than good, former BOJ Deputy Gov. Toshiro Mutoh has said.
Under a policy dubbed yield curve control (YCC), the BOJ guides short-term interest rates at minus 0.1 percent and long-term rates around 0 percent via huge asset buying in hope of hitting its 2 percent inflation target.
Mutoh, who retains influence on economic policy due to his close ties with incumbent financial bureaucrats, said it made sense for the BOJ to maintain its massive stimulus as inflation remained distant from its target.
But he questioned BOJ Gov. Haruhiko Kuroda’s argument that the central bank could take short-term rates deeper into negative territory if the economy needed more stimulus.
“There are too many demerits to deepening negative rates,” Mutoh said in an interview conducted Thursday.
“Even if the BOJ judged that it needed to ease, the tools available are limited,” said Mutoh, who is currently honorary chairman at private think tank Daiwa Institute of Research. “It would be hard for the BOJ to do anything more that would have a positive impact on the economy.”
The remarks, by the former colleague of Kuroda during their stints at the Ministry of Finance, underscore the challenge the BOJ faces in balancing the need to support the economy and minimize the strain put on financial institutions’ profits by prolonged ultralow interest rates.
Japan also has little room to deploy large-scale fiscal stimulus given its huge public debt, Mutoh said, warning against overly relying on spending packages to spur growth.
The BOJ’s ultraloose monetary policy is keeping borrowing costs low. But that would change if improvements in the economy prodded the central bank to raise rates, he said.
Since the collapse of Lehman Brothers in 2008 triggered a global financial crisis, Japan has spent over ¥80 trillion ($731 billion) in 13 extra budgets compiled to fund stimulus packages — nearly matching the size of the country’s annual state budget.
In the past, extra budgets were compiled only to fill unexpected shortfalls in funds caused by events such as huge natural disasters. But in recent years they have become regular practice as politicians have sought to win votes with generous spending, even when the economy has been in fairly good shape.
“It has become politically difficult not to compile a supplementary budget. This is a problem. It raises the question of whether such policy management is sustainable,” Mutoh said.
“Once Japanese government bonds lose market trust, it will become difficult for the government to freely issue debt.”