TOKYO Quantitative easing policy is effective in beating deflation if implemented through appropriate means and at a sufficient size, Kazumasa Iwata, a former deputy Bank of Japan governor, said on Wednesday.
Iwata, seen by markets as a strong candidate for next BOJ governor, also said excessive yen rises must be corrected for Japan to beat deflation and achieve 2 percent inflation -- a level new Prime Minister Shinzo Abe said he wants to see.
"Excessive yen rises are now being corrected. If policymakers seize this moment, Japan may be able to end deflation," Iwata told a news conference, while declining to comment on market speculation about his future.
Iwata, currently head of the Japan Center for Economic Research, a leading private think tank in Tokyo, has been an advocate of bolder monetary easing. That has made him a favorite among politicians as a possible successor to incumbent Governor Masaaki Shirakawa when his term expires in April.
During his five-year stint at the BOJ until 2008, the central bank engineered an exit from zero interest rates and a quantitative easing policy of pumping vast amount of money to markets via bond purchases. Iwata dissented against raising rates in 2007, arguing that doing so was premature with Japan barely out of deflation.
"We repeatedly hear people say that quantitative easing had no effect. I don't think that's true," Iwata said, countering the view held by many BOJ officials that the five-year policy did little to boost the economy and push up prices.
Iwata said he saw no problem with central banks pursuing massive government bond purchases to push down long-term yields and bolster the economy, given that many of them have seen short-term rates in their countries fall near zero.
There is room for the BOJ to improve the way it buys bonds, Iwata said, although he warned that Japan must also keep up efforts to rein in its huge public debt to prevent an unwelcome spike in long-term bond yields.
The BOJ set a 1 percent inflation target in February last year and eased monetary policy five times in 2012 via an increase in its asset-buying and lending program, under which it buys assets ranging from government bonds and private debt.
Under pressure from Abe for bolder steps to beat deflation, the central bank will consider easing policy again and double its inflation target to 2 percent, sources have told Reuters.
(Reporting by Leika Kihara; Editing by Shinichi Saoshiro)