• She sees little room for the BOJ to cut rate much further
  • Stimulus shouldn't be expanded at next meeting, says Shirai

In her first interview since leaving the Bank of Japan’s policy board less than two weeks ago, Sayuri Shirai said the BOJ has little room to cut its new negative rate.

QuickTake Negative Rates

Shirai, who voted with Governor Haruhiko Kuroda during most of her five-year term, was one of four dissenters on the January decision to adopt the rate. She said the central bank needs to do a better job of communicating its policy and also warned that it is likely to run up against limits on its bond purchases within two years.

“I don’t think the BOJ has a lot of room left to cut the rate further,” said Shirai, 53, whose term ended on March 31. She doesn’t think the central bank should expand stimulus at its next meeting April 27-28 and said more time is needed to monitor the impact of the negative rate.

Shirai’s comments come as the yen’s surge against the dollar fuels speculation that Kuroda may be forced to do more. As she spoke on Friday, the currency was trading back where it was before the central bank stepped up stimulus in October 2014.

‘Tough Situation’

“It’s a tough situation for the BOJ as the yen advanced rapidly, but further easing doesn’t necessarily stop that,” she said. “It’s possible that action now would invite more demand for stimulus from markets and then more speculative trading. This should be avoided.”

Kuroda indicated in parliament last month that he thinks there is quite a lot of room left to cut the rate and that minus 0.5 percent is theoretically possible.

Kazumasa Iwata, a former BOJ deputy governor who was on the board from 2003 to 2008, last week suggested a negative rate of minus 1 percent could be appropriate.

Rather than boosting stimulus now, the BOJ must consider the sustainability of its ultra-loose policy because it could take more than two years to hit its 2 percent inflation target, said Shirai, who is now a visiting professor at Keio University in Tokyo.

“Before taking any more action, it’s important for the BOJ to make strong efforts to let the Japanese people know what they are doing,” said Shirai. “Without doing this, the impact of any policy will be diminished.”

Waning Confidence

Confidence among companies and households has dropped since the negative-rate rate policy was introduced.

Prime Minister Shinzo Abe replaced Shirai, the only woman on the board, with Makoto Sakurai. Sakurai is an economist with links to aides to the prime minister and is thought likely to side with Kuroda in any decisions to expand stimulus.

As well as indicating that the rate can be cut further if needed, Kuroda has said he sees no limit for bond purchases at this point. After three years of his unprecedented easing, the size of BOJ’s balance sheet has swelled to about 80 percent of the world’s third-largest economy.

“The BOJ should step back and assess the current program carefully,” said Shirai. “The sustainability of the program is a real concern.”

One future option for the BOJ is to start tapering its purchases while lowering the negative rate, she said.

Former deputy governor Iwata said the BOJ may hit the limits of bond purchases by the middle of 2017.

At her last policy meeting March 14-15, Shirai voted for to keep the rate at minus 0.1 percent because it would be wrong to tighten the policy straight after its adoption, she said.

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