BOJ needs realistic price goal to avoid endless stimulus, ex-deputy governor says

The Bank of Japan should set a more achievable inflation target to avoid getting stuck with endless stimulus, according to a former deputy governor.

“It’s about time the BOJ set a realistic price goal rather than rigidly targeting 2%,” said Hirohide Yamaguchi, who left the bank in 2013, just before Gov. Haruhiko Kuroda took the helm. “We can’t see the prospect of inflation reaching it, even after more than eight years.”

Yamaguchi, the right-hand man under Kuroda’s predecessor Masaaki Shirakawa, said the central bank can instead accept a lower inflation goal and could start winding down stimulus even if the yen strengthened thanks to improved resilience among firms.

The remarks from Yamaguchi, who is also chairman of the Government Pension Investment Fund board, come ahead of a ruling party leadership contest later this month that will effectively determine Japan’s next prime minister. So far the likely candidates to replace Yoshihide Suga haven’t called for any major change to monetary policy or the inflation target.

Still, with other central banks around the world, including the Federal Reserve, mulling the timing of when to scale back their support for the economy, the topic of the BOJ’s long-running stimulus could become a talking point ahead of the Sept. 29 vote count.

“The BOJ shouldn’t continue with ultra easing just for the sake of the price target no matter how long it takes,” said Yamaguchi, who is also chairman of the advisory board at Nikko Research Center. “The bank must retain policy flexibility by reviewing the target at some point.”

The central bank should also put more emphasis on excessive liquidity and other negative side effects of its stimulus, so it can better justify a need to pare it back, he added.

Under Kuroda, the BOJ has stuck firmly to the 2% target, often citing it is a global standard while flagging the need to secure room for policy action and the need to keep foreign exchange rates stable. Current Deputy Gov. Masazumi Wakatabe spent a good chunk of his speech last week explaining the currency aspect.

The strength of the yen was a key reason why then Prime Minister Shinzo Abe called for aggressive monetary easing and installed Kuroda at the bank in 2013. During the Shirakawa-Yamaguchi years, the bank faced criticism of doing too little, too late. The currency at one point soared beyond ¥76 against the dollar.

Exporters say their break-even point is ¥99.8 per dollar, according to a Cabinet Office survey released in March. The yen was around ¥109.9 late Tuesday afternoon in Tokyo.

It’s doubtful that a strong yen would deal a big blow to Japanese businesses as it did in the wake of the global financial crisis, Yamaguchi said.

“Fears over a strong yen aren’t as strong as they used to be,” he said. “There’s no way capable Japanese firms haven’t addressed this problem after such a long time.”