- Nakahara says JGB buying should rise 20 trillion yen a year
- BOJ should ‘sound a signal gun’ with more stimulus, he says
One of Prime Minister Shinzo Abe’s top economic advisers sees the potential for the Bank of Japan to emulate the European Central Bank in buying riskier corporate debt in the future.
For now, Nobuyuki Nakahara, an intellectual father of the BOJ’s first stab at quantitative easing in 2001, urged the BOJ to step up deployment of its main policy tool -- government bond buying. He said in an interview Friday the central bank ought to bring its target for those purchases up to 100 trillion yen ($942 billion) a year, from 80 trillion yen.
For the BOJ, it is “of course possible” to take such steps in the future, Nakahara said. He separately said that policy makers should avoid cutting the negative benchmark rate for now, as the central bank is still examining the impact of that tool.
BOJ policy makers meet June 15-16. Now would be a good time for monetary stimulus to accelerate, so that it can dovetail with fiscal policy, in the wake of Abe’s decision to delay a 2017 sales-tax rise that would have put a drag on the economy, he said.
“It’s better for the BOJ to act as soon as possible,” Nakahara said. “The BOJ should sound a signal gun by adding more stimulus.”
BOJ in the future could purchase riskier corporate bonds, even ones rated as junk, Nakahara said. The economic situation has changed from when he was at the BOJ board from 1998 to 2002 as Japan struggled with the global financial crisis, he said.
The BOJ is scheduled to meet June 15-16. While some economists forecast that Governor Haruhiko Kuroda and his colleagues will expand the record asset-buying program at the meeting, most anticipate the central bank will hold off until July for further action. When it does adjust policy, increased purchases of exchange-traded funds and a deeper cut to negative interest rates are seen as the two most likely measures.
Nakahara’s view has evolved since the run-up to the last BOJ meeting, at the end of April. He said at that time that the central bank was doing what it could, and that “there is a limit to how much a nation can do with its own policy.” He recommended against adding stimulus, a call that was borne out when the BOJ surprised investors by taking no action.
Abe delayed the 2017 tax hike out of concern about possible damage to domestic demand. Japan fell into a recession when the levy was last raised in 2014 and since then the economy has moved between slight growth and contraction.
“We have a clear path free from any fiscal drag” for more than three years because of the tax delay, said Nakahara, who was a friend of Abe’s father and is among a close circle of economic advisers to the prime minister. “To make the most of this chance, we should start again with the first arrow” of Abenomics, or aggressive monetary policy, he said.
ECB President Mario Draghi showed his revolve to do what it takes to boost inflation last week by buying corporate bonds at junk status and of troubled German automaker Volkswagen AG. The BOJ has kept holdings of corporate bonds at 3.2 trillion yen in its asset-purchase program, with those rated BBB or higher. There would be a precedent for the BOJ to follow the European bank, as Kuroda borrowed a page from Draghi in adopting a negative rate strategy earlier this year.
Kuroda remains far from the BOJ’s 2 percent inflation target even after three years of record stimulus. Core inflation has been falling. Nakahara said it would be more realistic for the BOJ to adjust the two-year time frame for meeting the inflation target.
“I think it’s better to make it abstract, something like as soon as possible, as long as the economic situation allows because you can’t predict the outlook of the economy,” Nakahara said. “It’s better not to promise two years or three years, something that can’t be fulfilled.”
While Nakahara said there is no technical limit for BOJ bond purchases at this point, the floor of a negative rate policy could be as low as minus 0.5 percent.
“If you ask me if monetary policy is coming close to a limit, I would say yes,” he said. “If you ask me if fiscal policy is coming close to a limit, I would say yes. So we don’t need to do anything more? Absolutely not.”