KOBE Japan Sluggish exports and factory output could mean the Japanese economy's post-tax hike rebound in the third quarter may be weaker than expected, a central bank policymaker has said, warning of clouds hanging over its stimulus programme.
Board member Takahide Kiuchi said the Bank of Japan's next policy move ought to be an exit from, not an expansion of, monetary stimulus, repeating his warning that keeping an unconventional policy in place for too long could cause distortions in the economy.
The BOJ should consider shifting the focus of monetary policy to zero interest rates from asset purchases when moving to end its ultra-loose stance, Kiuchi said, the first board member to publicly discuss the best possible way to end its quantitative and qualitative easing (QQE) programme.
"Under QQE, the BOJ purchases assets on an unprecedented scale. Therefore, it is necessary to be particularly vigilant against various potential risks," he said in a speech to business leaders in Kobe, western Japan, on Thursday.
A former market economist, Kiuchi said there was no need to alter the BOJ's forecast for the economy to continue recovering moderately as robust domestic demand made up for weak exports.
But he warned the sharp build-up of inventory in June suggests that companies may have overestimated demand and were caught off-guard by the weakness in exports and household spending after a sales tax hike in April.
"I don't see the need to change our view that economic growth will pick up in the third quarter, but the pace will be moderate," Kiuchi told a news conference after his meeting with business executives in Kobe.
"Monthly economic indicators have also been relatively weak, so while third-quarter economic growth is likely to be positive, it may not be as strong as initially expected."
Kiuchi was the first board member to speak publicly after Wednesday's data showing factory output in June suffered its biggest fall since the devastating earthquake in March 2011, calling into question the BOJ's argument that the economy will ride out the April tax hike.
Exports also unexpectedly fell for two months, disappointing policymakers who had hoped overseas shipments would rebound before the tax hike hits consumer spending.
Kiuchi is among those on the BOJ board who tend to be more pessimistic about the economic and price outlook, and he warned that exports may not rebound any time soon due to structural factors such as the increase in the number of Japanese firms that have shifted production abroad.
"I don't think the economy will falter because domestic demand continues to support the recovery even as exports fail to pick up," Kiuchi said. "But if exports don't grow as much as initially expected, we may have to cut our growth forecasts."
In its latest forecast issued in July, the BOJ expected the economy to expand 1.0 percent in the business year ending March 2015. That was more upbeat than private sector analysts, some of whom now warn Japan may barely grow in the current fiscal year. The BOJ will next review its forecasts in October.
REVERTING TO RATE POLICY AN OPTION
Kiuchi repeated his view, which is not shared by others on the board, that the BOJ should consider its 2 percent inflation target as a long-term goal without a deadline, instead of setting a two-year timeframe for achieving it.
Under the QQE programme put in place last April, the BOJ has pledged to double base money through aggressive asset purchases to achieve its 2 percent price growth target in two years.
While the BOJ now targets base money, not interest rates, its asset purchases have pushed down bond yields across the curve with 10-year borrowing costs now around 0.5 percent.
Kiuchi said that unconventional monetary policy, such as the asset purchases under QQE, is effective as a temporary measure to boost the economy but should not be used for too long because its drawbacks are still unknown.
A conventional interest rate policy, on the other hand, is useful as a fine-tuning tool to guide the economy and prices to desirable levels after massive asset purchases lift sentiment, he said.
"If developments in economic activity and prices continue to steadily improve, I think it will be necessary in the future to examine the option of gradually starting to shift the focus of monetary policy conduct from asset purchases to zero interest rates," he said.
Kiuchi has shared doubts, also held by many private-sector analysts, that Japan will actually see 2 percent inflation in two years after having been mired in deflation for nearly two decades.
At the news conference, Kiuchi said the level of desirable consumer inflation varied from country to country. For Japan, it was near current levels around 1 percent.
"It may be feasible to aim for 2 percent inflation in the medium- to long-term. But for now, that's too high."
(Editing by Chris Gallagher and Eric Meijer)