The Bank of Japan must abandon the view it can influence public perceptions with monetary policy and conduct a “genuine” review that takes a harder look at the rising cost of prolonged easing, said former central bank deputy governor Hirohide Yamaguchi.
The BOJ will conduct a review next month to make its monetary policy tools more sustainable, nodding to criticism its policy is crushing bond yields, drying up market liquidity and distorting stock prices.
But Yamaguchi, who was deputy governor when the BOJ first began buying exchange-traded funds (ETF) in 2010, said the costs of the bank’s stimulus programme have become too large to mitigate in the review in March.
“It’s unlikely the BOJ can come up with an outcome that has a substantial impact on the economy and markets,” he told Reuters in an interview on Monday.
“The review will probably be just a show of gesture that it’s doing ‘something’ to address the cost,” said Yamaguchi, who retains strong influence on incumbent policymakers.
Under its yield curve control (YCC) framework, the BOJ guides short-term interest rates towards -0.1% and 10-year bond yields to around 0%. It also buys risky assets such as ETFs to fire up inflation.
Ideas floated in the BOJ, which could be discussed at the review, include allowing the 10-year bond yield to deviate more from its 0% target, and making its ETF buying nimble so it can slow buying when stocks are booming.
Tolerating bigger yield swings, however, could undermine the feasibility of YCC by highlighting the limits of the BOJ’s control over the yield curve, Yamaguchi said.
“It’s hard to control long-term interest rates within a tight range for a long period of time,” he said, calling for an overhaul of YCC – something the BOJ rules out as an option.
Yamaguchi also called for halting the BOJ’s ETF purchases, as the bank could “end up using monetary policy to prop up stock prices” if the programme continues.
“At the very least, the BOJ must end as soon as it can the current situation where its ETF holdings keep accumulating.”
When the BOJ began buying ETFs in 2010, it used a pool of funds to ensure purchases remain at a manageable level, said Yamaguchi, who was involved in the decision.
That cautious approach was replaced by Governor Haruhiko Kuroda, Yamaguchi said, after he took over as head of the BOJ in 2013. Kuroda ramped up purchases dramatically with his “bazooka” stimulus deployed that year under a pledge to deploy all available means in a single blow. Eight years on, inflation remains distant from the BOJ’s 2% target.
“It’s impossible for the BOJ to guide public perceptions at its will,” Yamaguchi said. “It’s time now for the BOJ to conduct a ‘genuine’ policy review and use the findings to modify its policy framework.”