At BOJ, Concerns Are Said to Broaden Over Policy Sustainability

  • People familiar with talks don’t comment on July 29 meeting
  • Some see a case for a rethink on overall framework in future

An increasing number of officials at the Bank of Japan are concerned about the sustainability of the current framework for massive monetary stimulus, according to people familiar with the discussions.

Some current and former BOJ officials, including dissenting board member Takahide Kiuchi, have for some time publicly said that the central bank’s unprecedented scale of bond purchases and time frame for achieving its 2 percent inflation goal is problematic.

Now, there’s a broadening sense among some at the BOJ that the bank has to weigh the costs and benefits of policy measures more carefully, according to the people, who asked not to be named as the discussions are private. None of the people spoke about what the BOJ may do on July 29, and none commented on the views of Governor Haruhiko Kuroda, who has dominated policy making since taking the helm in March 2013.

Given the BOJ’s multiple misses on its price target, observers outside the central bank have urged it to reconsider its goal for achieving 2 percent "at the earliest possible time" and within a period of about two years. Bond market participants have long complained about the BOJ’s government-debt purchases undermining trading conditions -- criticism that officials have been made well aware of. And the banking industry has voiced complaints about the adoption of negative interest rates.

Bond Yields

The concerns among some officials include whether lowering bond yields from levels that are already at record lows will stimulate the economy and whether stepped-up bond purchases would shorten the life of the current program.

Speculation about some shift in the BOJ’s easing jumped last week, when former Federal Reserve Chairman Ben S. Bernanke met with top policy makers including Kuroda. Bernanke, famous for urging close fiscal and monetary coordination to stoke reflation, earlier this year in a blog post discussed the idea of "helicopter money," where a central bank effectively underwrites the government.

Helicopter Idea

Before Bernanke’s Tokyo visit, Kuroda said there was no need for and no possibility of helicopter money, in remarks recorded in mid-June for a BBC Radio 4 program that aired Thursday. In that broadcast, he also underscored that the BOJ was determined to eradicate Japan’s deflationary mindset, and could add stimulus in its three dimensions of easing if needed.

The governor’s original "quantitative and qualitative easing" program took a new dimension in January, when the BOJ unexpectedly adopted a negative interest rate for a portion of the cash balances that commercial banks park at the central bank. That step was taken even after Kuroda had previously rejected the option.

The core of QQE with a negative rate remains expanding the money supply, mainly through purchases of government bonds. The third element is purchases of risk assets.

The governor chuckled along with his New York audience in October 2014 when he pointed out the BOJ’s holdings of about 20 percent of outstanding government debt was modest compared with the Bank of England, which had vacuumed up about 40 percent. The BOJ’s ratio stands around 34 percent, and it continues to rise.

Most analysts do anticipate the BOJ will escalate its stimulus in some way when it meets next week on July 28-29, whether through stepped-up bond buying or more purchases of riskier assets such as exchange-traded funds or through a further rate cut.

What one former executive director at the BOJ has proposed is to twin an acceleration of stimulus with a redefinition of the central bank’s objective with regard to 2 percent inflation. Hideo Hayakawa, who left the central bank in 2013, urged it to recognize that it will have to start tapering its bond buying, and scrap its reference to reaching 2 percent within about two years -- a pledge that’s at odds with almost all private forecasts.

Another option suggested by some analysts in recent years: a switch to targeting long-term bond yields, with no specific target for the volume of debt purchases.

None of the people familiar with the talks was prepared to comment on what might result from any rethink of the current BOJ framework, or when such a step might be taken.

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