A Bank of Japan (BOJ) board member yesterday expressed pessimism about the economy and the central bank’s strategy, saying in a speech that the BOJ would be unable to reach its 2 percent inflation target as forecast and negative rates would not work to boost investment.
“I believe that it is desirable to aim to achieve the price stability target of 2 percent as a medium to long-term goal and I expect that the road toward this goal will be long,” BOJ board member Takehiro Sato said in a speech in Kushiro, Hokkaido.
Sato dissented on the January decision to adopt a negative-rate policy and also in October 2014, when the BOJ expanded stimulus.
“I believe that the challenge from now on is reforming the policy framework, which is intended to provide solutions in the short term, so as to adapt it to a long-term initiative,” he said. “The first thing the bank should do for that purpose would be to make the asset purchase operation more flexible.’’
Sato’s concerns about reaching the 2 percent price target as forecast echo those of some investors as BOJ Governor Haruhiko Kuroda continues to buy bonds at a record pace and keeps expanding stimulus, yet inflation hovers near zero.
Former BOJ deputy governor Kazumasa Iwata — who served on the board from 2003 to 2008 — has predicted that the BOJ is set to hit a wall in terms of asset purchases by the middle of next year.
“There are growing concerns about the sustainability of the BOJ’s easing,’’ said Daisuke Karakama, chief market economist in Tokyo at Mizuho Bank, a unit of the country’s third-biggest lender. “We can’t see when the BOJ is going to meet the price target and if you take Kuroda’s words at face value, he will have to keep adding stimulus.”
Sato said he expects the economy to “remain sluggish in the future.”
The economy “is so fragile as to be liable to post negative growth even because of trivial external factors such as weather conditions,” he said.
Sato cited risks from a negative-rate policy adopted in January because it clashes with the expansion of monetary base target.
He also repeated that the BOJ’s bond purchases should be conducted flexibly as he believes it is fine for the bank to fall short of its targeted annual pace of ¥80 trillion (US$734.82 billion) increase in bond holdings.
The BOJ has to buy about ¥120 trillion of bonds this year as some bonds mature, which is more than 90 percent of newly issued bonds in Japan’s market. The BOJ held 32 percent of government bonds at the end of December last year, according to the bank.
“From financial institutions’ recent move to purchase super-long-term bonds in pursuit of tiny positive yields, I detect a vulnerability similar to that seen before the so-called ‘VAR [value at risk] shock’ in 2003” when Japan’s bond yields surged in the short term, Sato said.
Kuroda has reiterated he does not see any limit for BOJ’s bond purchases.
“It is my sincere hope that the bank will conduct monetary policy flexibly under the flexible price stability target while obtaining a better understanding by the market,” Sato said.
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