Tue, Dec 02, 2014 - Page 15 News List

Former Bank of Japan board member identifies risk of runaway inflation

Bloomberg

The Bank of Japan’s unprecedented quantitative easing risks indefinite financing of government deficits that could eventually trigger runaway inflation in the world’s third-biggest economy, former policy board member Miyako Suda said.

The central bank’s bond purchases are feeding complacency in Japan’s government about its debt and preventing the market from signaling a warning through higher yields, said Suda, 66, who was on the board from 2001 to 2011.

While the easing has driven down the yen and boosted stocks, the effects on the economy are “less than clear,” she said in an interview on Friday last week.

The criticism from Suda, who served under former bank governors Masaru Hayami, Toshihiko Fukui and Masaaki Shirakawa, underlines the heating debate about the dangers of a policy that sees the central bank ready to buy from the market every new Japanese government bond issued.

Japanese Prime Minister Shinzo Abe last month delayed a sales tax increase after bank Governor Haruhiko Kuroda boosted stimulus to spur inflation.

“The Bank of Japan’s Japanese government bond purchases make the government complacent,” said Suda, who is currently an adviser at the Cannon Institute for Global Studies in Tokyo. “If this policy continues, there is a risk of bad inflation spurred by the weak yen and risk that the price increases become uncontrollable.”

The bank buys up to ¥12 trillion (US$101 billion) of Japanese government bonds per month, giving it room to absorb the ¥10 trillion in new bonds that the Japanese Ministry of Finance sells each month.

Suda said bank officials should start studying how it can eventually unwind its easing.

“If the bank researches the cost of an exit, they will realize the danger of the continued open-ended policy,” she said.

Abe, who faces the heaviest public debt burden in the world, last month delayed a planned 2 percentage point increase in the sales tax from October next year to April 2017. A 3 percentage point bump in April helped tip Japan’s economy into its fourth recession since 2008.

The yield on Japan’s benchmark 10-year government bond was at 0.42 percent at 2:58pm yesterday in Tokyo. The yen was at ¥118.40 per US$1 as of 5:56 pm in Tokyo.

The Japanese currency has dropped 21 percent since the bank unveiled unprecedented easing in April last year and is down 7.2 percent since Oct. 30, the day before Kuroda led a divided policy to add more stimulus.

Rising import costs due to the cheaper yen have added to the cost of living, which has outpaced income gains. Consumer prices rose 2.9 percent in October from a year earlier, more than a 0.7 percent increase in total cash earnings in September.

Suda said the bank is losing public support for its easing because people are feeling the drawbacks of higher inflation.

“It is desirable to take time to achieve the price goal. This is a message public is sending,” Suda said.

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