Haruhiko Kuroda will have limited options for aggressive easing if he’s confirmed as central bank governor as more Japanese government bond purchases heighten the risk of a market bubble, a former BOJ policy board member said.
“Kuroda will hit the wall of reality,” Atsushi Mizuno, vice chairman at Credit Suisse AG in Tokyo and a member of the BOJ board from 2004 to 2009, said in an interview today. “Increased bond buying would cause over-dependence on the BOJ and that’s not healthy for the market. I see the risk of a JGB bubble.”
Bond yields are near decade lows as investors expect the BOJ to take more aggressive steps to end deflation once Governor Masaaki Shirakawa steps down on March 19. Asian Development Bank President Kuroda -- Prime Minister Shinzo Abe’s nominee for BOJ chief -- said this week the central bank should consider buying large amounts of longer-term bonds.
“My concern is that Kuroda is over-emphasizing a bit too much his will to end deflation without explaining his plan for an exit strategy,” Mizuno said. “From the start he will try to do something new, but I expect he will eventually return to an extension of the current policy framework.”
Stocks rose today, with the Topix Index closing at the highest since 2008 amid expectations for more easing. The benchmark 10-year yield touched 0.585 percent yesterday, the least since June 2003, before climbing to 0.67 percent today. The yen was 0.1 percent higher at 93.21 per dollar as of 2:47 p.m. in Tokyo.
Mizuno said that a 2 percent inflation target cannot be achieved by monetary policy alone.
“Productivity has to be much higher,” he said. “That has to be boosted by the government’s growth strategy. As Shirakawa has repeatedly said, monetary policy is only for buying time. It’s not a panacea.”
As a BOJ board member, Mizuno was an advocate of interest-rate increases before switching his position when the global financial crisis prompted the central bank to cut the benchmark rate and start buying corporate debt.
Last year, he criticized the BOJ for a lack of clarity on its intentions, saying it was making decisions that seemed at odds with the stance of its policy makers.
Kuroda told lawmakers in Parliament on March 4 that the Bank of Japan will do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could start sooner than next year.
The “scale and scope” of the assets purchased by the central bank so far are not enough to achieve the price target, Kuroda said.
The central bank currently buys bonds with maturities of up to three years, as well as exchange-traded fund and other risks assets, through a fund targeted to reach 76 trillion yen ($815 billion) by the end of this year.
In January, the central bank adopted the 2 percent target and said it would move to open-ended asset-purchases from 2014.
Some economists say the risks that come with buying more bonds may be worth taking.
“Those costs need to be weighed against the benefit of ending deflation,” Barry Eichengreen, an economics professor at the University of California, Berkeley, said in a telephone interview last month. “Simply because something costs doesn’t mean it’s undesirable.”
The yen’s alomost 12 percent fall against the dollar in the past three months has bolstered confidence among some manufacturers. Toyota Motor Corp. raised its profit forecast to a five-year high. Hiroshi Tomono, the head of a steel industry group, told reporters on Feb. 28 he expects the central bank under Kuroda to act quickly in tandem with the government.