- BOJ should cut rate, buy more bonds, ETFs, Takatoshi Ito says
- Ito says that waiting risks further appreciation of the yen
The Bank of Japan should expand already-record stimulus at its April meeting, as a wait-and-see stance risks further appreciation of the yen, according to Takatoshi Ito, a former colleague of Governor Haruhiko Kuroda.
“It would be better for the BOJ to act in April,” Ito, currently a professor at Columbia University in New York, said in an interview. “If they opt to monitor economic conditions, the yen may gain more and the BOJ is likely to be forced to add easing in June in response to the markets’ demands. Then, the effects of stimulus would be limited.”
The central bank is in unfamiliar territory, with it’s new negative rate policy generating criticism and unable to lift stocks and weaken the yen like the two previous rounds of stimulus did. Kuroda defended the policy this week, saying markets would’ve been worse off without it, while board member Yutaka Harada said that it was too soon to judge its effects.
Ito’s view underscores the importance of the April 27-28 policy meeting, at which the bank will also announce it’s growth and inflation forecasts. Kuroda told reporters in Washington that "excessive yen gains" have been somewhat corrected in recent days and that it is necessary to "monitor developments in the economy for a little while." He also reiterated this week he will adjust policy without hesitation if needed.
Additional stimulus by the BOJ is unlikely to invite criticism from the global community as Europe is adopting similar policies and Japan is basically following what the U.S. Federal Reserve did after the financial crisis that followed the collapse of Lehman Brothers, Ito said.
The BOJ should deploy a combination of tools in its next move -- expand the pace of bond purchases to 100 trillion yen ($912 billion) from 80 trillion yen now, and cut the negative rate, possibly to minus 0.3 percent, Ito said. The bank can also step up the pace of purchases of exchange traded funds, he said.
The currency’s appreciation to stronger than 110 yen to the dollar warrants caution as it may sap Japan’s recovery by squeezing corporate profits, said Ito. Even so, any intervention to stem the gains would be unpopular, especially amid a debate in the U.S. presidential election on currency and ahead of the Group of Seven summit in Japan next month, Ito said.
The International Monetary Fund sees “no good reason” for Japan to intervene at this point, the fund’s mission chief in Tokyo said this week, while Christine Lagarde said intervention was only justified in cases where "very disruptive volatility must be avoided.”
Ito was a deputy to Kuroda at the finance ministry in 1999 and 2000, when Kuroda was in charge of currency policy. Kuroda last year credited Ito for convincing him that inflation targeting can be effective policy.