Bank of Japan Governor Masaaki Shirakawa said central bankers must consider the dangers of keeping interest rates low for too long as they seek to strengthen the global recovery from the 2008 financial crisis.
“If low interest rates induce investment projects that are only profitable at such interest-rate levels, this could have an adverse impact on productivity and growth potential of the economy by making resource allocation inefficient,” Shirakawa said yesterday at a Federal Reserve conference in Washington.
Central banks across the developed world have maintained record-low borrowing costs, with the Fed saying it’s likely to keep its main rate close to zero through at least late 2014 to reduce unemployment. The BOJ has held its benchmark interest rate below 1 percent for more than a decade as monetary stimulus failed to revive consumer spending following the collapse of a real estate asset price bubble in the 1990s.
A comparison of Japan after its 1997 banking crisis and the U.S. after the housing-market bust show “surprisingly similar trends,” and the BOJ and the Fed responded in similar ways as well, Shirakawa said. He spoke on a panel that included Fed Vice Chairman Janet Yellen and Bank of England Governor Mervyn King.
“Extraordinary easy monetary policy” either through interest rates or central-bank asset purchases “will not solve the underlying balance-sheet problems,” Jaime Caruana, general manager at the Bank for International Settlements in Basel, Switzerland, said yesterday at the conference. “This policy can buy time but it is very important that this time is used properly to address the roots of the problems.”
Central banks “need to do more to promote effective balance-sheet repair,” he said.
Three of the four papers presented to the conference yesterday focused on financial stability, a sign of central banks’ deep involvement with financial regulation and market surveillance after the crisis.
Both Shirakawa and King warned that a move into financial policy subjects central banks to greater accountability. U.S. central bankers are facing resistance from financial firms as they use their powers to increase capital standards and scrutinize compensation and dividend policies, tasks that bank boards of directors once performed with a higher level of autonomy.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon asked Fed Chairman Ben S. Bernanke in public last June whether he “has a fear like I do” that overzealous regulation “will be the reason it took so long that our banks, our credit, our businesses and most importantly job creation to start going again.”
Banks are also pushing back on a rule in the Dodd-Frank Act, the most sweeping U.S. financial regulatory reform since the 1930s, that would limit proprietary trading.
Central bankers should find it “straightforward” to be accountable for their policy toward inflation, Shirakawa said. That is what the public demands for entrusting monetary policy to a “technocratic institution,” he said.
“Macroprudential considerations are much more nebulous,” he added, and contain more elements of “art rather than science -- and will inevitably test the limits of democratic deference to the conduct of monetary policy.”
King also urged central bankers to give “careful thought” to ensuring adequate accountability on regulation.
“It will be pretty crucial to explain what we are doing and why,” he said.
Central banks should expect increased “political and public scrutiny” as they broaden the scope of their activities, Caruana said.
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