- Japan addicted to stimulus that isn’t working: Mitsuru Iwamura
- Floating coupon central to former BOJ official’s exit strategy
A Bank of Japan veteran-turned-critic says there’s only one way policy makers can avoid a collapse in the yen and bonds -- sovereign debt with no maturity date and no fixed coupon.
Making the repayment of government notes open-ended and with interest rates that float is part of an unconventional plan pitched by Mitsuru Iwamura, a Waseda University professor who worked at the BOJ for over two decades until 1998. Amid growing speculation of additional bond-buying stimulus next week that could include so-called helicopter money, Iwamura says a road map for tapering is needed right away.
“When the time comes to exit stimulus, yields will rise no matter what -- so if the BOJ’s bond holdings have fixed coupons, they will suffer a massive valuation loss, risking a collapse in the yen and fiscal trust,” Iwamura, 66, said in an interview Monday. “It’s like the situation in Japan in the summer of 1944. It’s too late to argue over whether it was right to start a war. What’s important now is how to end it.”
Market watchers have long argued that the BOJ’s bond purchase program is unsustainable, even as Governor Haruhiko Kuroda reiterated as recently as April that monetary policy doesn’t face limits. The central bank needs to be careful when it pulls back because it now owns more than a third of outstanding sovereign debt, leading to investor complaints over poor liquidity and market functioning. Yields have dropped to records across maturities, and are below zero on four of every five securities.
Prime Minister Shinzo Abe’s adviser Etsuro Honda said former Federal Reserve Chairman Ben S. Bernanke had floated the idea of helicopter money using non-marketable perpetual bonds to him at a meeting in Washington in April. Bernanke said that the framework -- in which the government issues the notes with no maturity date and the central bank directly buys them -- could work as the strongest tool to overcome deflation, according to Honda.
The BOJ stands to lose 35 trillion yen ($327 billion) on its holdings should the benchmark yield rise to 1 percent when it tapers bond purchases, removing the biggest buyer from the market, according to Iwamura. A floating coupon linked to the overnight interbank rate would cushion the central bank from those losses, as it adjusts naturally to financial conditions, he said.
Iwamura isn’t the only former BOJ official to criticize current policy this week. Hideo Hayakawa, a former executive director, called on the central bank to use its July 28-29 meeting to end “two big lies”: that there’s unlimited space for additional easing, and that it can reach its 2 percent inflation goal within about two years.
Kuroda has extended his target time frame repeatedly since launching stimulus in April 2013. One closely watched gauge of consumer prices declined in May for a third straight month.
Seventy percent of clients and staff in a Citigroup Inc. survey released this week said they expect action at next week’s meeting. The rest predicted additional easing in September or later.
That would supplement fiscal stimulus currently being compiled by the government. While the amount of spending has yet to be announced, Abe has pledged that it will be “bold” and “broad.”
“The reason the government pivoted to fiscal spending is that they think monetary policy is reaching the limits of its effectiveness,” said Ryutaro Kono, the chief Japan economist at BNP Paribas SA in Tokyo. “They have one foot in helicopter money already.”
The 10-year Japanese government bond yielded minus 0.235 percent as of 3:21 p.m. in Tokyo on Thursday, from an all-time low of minus 0.3 percent reached on July 8. The yen fell 0.3 percent to 107.18 per dollar, bringing its year-to-date gain to 12 percent.
“The Japanese economy is hooked on stimulus -- and even though officials have started to realize it’s not working, they’re too scared to stop using it,” said Iwamura, the Waseda professor. “My plan isn’t a new monetary policy. It’s just a prescription to save the government, the BOJ and the economy from their addiction.”