TOKYO The Bank of Japan must be cautious about meeting political demands to fund fiscal spending with its printing press, even as it battles deflation with ultra-loose monetary policy, said Eiji Hirano, a potential candidate to fill top BOJ positions opening up next spring.
While the central bank should continue with its powerful monetary easing to beat deflation, that alone won't be enough to revive the economy, said the former BOJ executive, calling for government efforts to promote deregulation and nurture new industries with growth potential.
"When politicians don't have confidence in their policies, they use central banks as scapegoats. This is happening not just in Japan but in the United States and Europe, and will likely continue," he said.
"To restore fiscal discipline, a central bank must be stubborn and an inconvenient one to deal with for politicians."
BOJ Governor Masaaki Shirakawa's term expires in April next year and that of his two deputies in March, leaving three vacancies at the central bank's nine-member board.
Shinzo Abe, the likely next premier after a lower house election on December 16 that polls show his main opposition party will win, will have a strong say in filling those posts. He has said he wants a new governor more keen than Shirakawa to take bolder monetary stimulus to beat deflation.
While Abe is unlikely to choose a former or career central banker as governor, he may decide to appoint one to fill a deputy governor post so the person can assist the governor in administrative and international affairs.
That leaves the possibility of former BOJ executives like Hirano, who left it in 2006 but still has close ties with central bankers across the globe, joining the board.
Hirano said that while there was room for improvement in how the BOJ communicates its policy intentions to the public, the central bank was already easing policy quite aggressively.
"It's important the BOJ continues its powerful easing to beat deflation and when necessary, take further action," he said.
Hirano shrugged off calls from Abe for the BOJ to pursue "unlimited" easing, saying that reckless money printing by the could erode market trust in Japan's ability to manage its debt and trigger a dangerous bond yield spike.
He also said that while 2 percent inflation would be an ideal level in the long run, it would be irresponsible for policymakers to commit to such a target when Japan is still far from achieving the BOJ's current 1 percent inflation goal.
"It's very dangerous to think that once we have inflation, everyone will be happy. It doesn't quite work that way."
Hirano, who has experience attending numerous G7 meetings during his career at the BOJ, is now executive vice president of Toyota Financial Services, the financial arm of Toyota Motor Corp. (7203.T).
The BOJ set a 1 percent inflation target in February and eased policy four times so far this year. But its failure to put a clear end to more than a decade of grinding deflation has led to criticism from politicians that it wasn't doing enough to revive the stagnant economy.
(Additional reporting by Yoshifumi Takemoto, Editing by Jonathan Thatcher)