No Taboos for BOJ Contender Muto in Japan Deflation FightToru Fujioka and Masahiro Hidaka
Former Bank of Japan Deputy Governor Toshiro Muto said that all policy options should be available to the central bank as it looks to turn around more than a decade of falling prices.
“The top priority for Japan is to defeat deflation, even if there are side effects,” Muto, chairman of the Daiwa Institute of Research and a possible contender to replace BOJ Governor Masaaki Shirakawa, said in an interview in Tokyo yesterday. “I don’t think it’s right to consider any possible measure as taboo as the flexibility or boldness of monetary policy will be lost.”
The BOJ is set to adopt Prime Minister Shinzo Abe’s desired 2 percent inflation target today, according to 21 of 23 economists surveyed by Bloomberg News. The bank’s policy meeting may end between noon and 3 p.m. Tokyo time, based on practice over the past three months. Ending consumer-price declines would give companies and households more incentive to borrow, helping the world’s third-biggest economy to pull out of a contraction.
Muto declined to comment on specific monetary policies, including foreign bond purchases, cutting interest rates on bank reserves held at the BOJ and expanding the central bank’s asset-purchase program.
“It is highly probable that easy monetary policy will continue until at least the end of 2014,” said Muto, 69. “Buying government bonds is the most appropriate for quantitative easing, and the most realistic policy.”
Muto, who served as BOJ deputy governor for five years, was the government’s first choice for the top job in 2008, only for his nomination to be rejected by upper house lawmakers who saw his finance ministry background as a threat to the bank’s independence.
The yen fell 0.1 percent to 89.68 per dollar as of 10:14 a.m. local time, ahead of the BOJ decision.
In 2007, as deputy governor, Muto said that keeping rates too low could be problematic. Asked yesterday if he had changed his view because ending deflation was now the top priority, he said: “Yes.”
“In an economy with such entrenched deflation, the risk of inflation is a very unlikely scenario. I strongly think that a policy of monetary easing is justified,” Muto said.
The central bank may increase its asset purchases by 10 trillion yen ($111 billion) at today’s meeting, according to the survey.
Mari Iwashita, a bond strategist at SMBC Nikko Securities Inc., sees Muto as the favorite to succeed Shirakawa.
The BOJ’s holdings of Japanese government bonds exceeded 100 trillion yen ($1.1 trillion) for the first time at the end of September, according to the bank, raising the risk that yields will jump on perceptions that it is financing public spending.
Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former BOJ official, predicts the central bank will today adopt open-ended purchases of assets such as government debt at the rate of 4 trillion yen per month.
The yen has fallen around 10 percent against the dollar since mid-November as Abe urged aggressive easing to end deflation and boost growth. The Nikkei 225 Stock Average has risen in the last ten weeks as a weaker currency boosts the outlook for exporters.
Yields on Japanese government debt fell yesterday, with the benchmark 10-year government bond yield dropping to 0.735 percent.
“We need to head toward more accommodative policies,” said Muto, who worked at the finance ministry for 37 years. “We of course need to monitor negative effects but we shouldn’t hit the brakes.”
Those comments contrast with Koichi Hamada, a retired Yale University professor who’s advising Abe on choosing a new central bank chief. Hamada said Jan. 20 that the BOJ will need to slow easing if the effects on prices and the yen go too far.
Abe’s Liberal Democratic Party said in its campaign manifesto that the BOJ should be included in a proposed private-public fund to buy foreign bonds. Shirakawa has said that buying foreign bonds would amount to currency intervention, which is the responsibility of the finance minister.
The government is set to present its nominations for the governorship and the two deputy governor positions around Feb. 15, the Nikkei newspaper said last week. Shirakawa’s term expires in April and those of his two deputies end in March. Two entrants to the policy board last year have already pressed for bolder policy action, giving Abe the chance to forge a pro-easing majority on the board.
Another potential candidate to succeed Shirakawa is Asian Development Bank President Haruhiko Kuroda, according to JPMorgan’s Kanno. Kuroda said this month that the BOJ should conduct unlimited easing until it achieves 2 percent inflation.