TOKYO The Bank of Japan is likely to hold off on expanding monetary stimulus for as long as possible but when it does act, it will take "extraordinary" steps such as buying government bonds on a massive scale, a former central bank policymaker said on Monday.
Miyako Suda, who served on the BOJ board for a decade until 2011 and helped to plot Japan's battle against deflation, added that despite some initial success the central bank is unlikely to meet its inflation target, since it is unclear how its huge asset purchases would lead to higher inflation expectations.
"The BOJ will probably maintain its bullish price forecast for as long as possible and keep policy unchanged until it becomes absolutely impossible to continue arguing that its price target can be met," Suda told Reuters in an interview.
"But once he feels something must be done, I think Governor (Haruhiko) Kuroda will do something quite extraordinary because small steps won't work," said Suda, who is now special adviser at the Canon Institute for Global Studies, a private think tank.
The BOJ has stood pat on monetary policy since deploying an intense burst of stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in roughly two years.
Kuroda has repeatedly said Japan is on track to meet the price target as consumer inflation, which hit 1.3 percent in February, will accelerate due to improvements in the economy. But markets are unconvinced that inflation will accelerate much from here and are betting on another stimulus around July.
Suda warned of the difficulty of changing public perceptions about future price moves with monetary policy, arguing that there is no clear evidence that flooding markets with cash can heighten inflation expectations.
By offering massive stimulus in a single blow last April to shock markets, the BOJ has left itself with few steps to revive the economy and made future policy "very difficult," Suda said.
"As for policy options that remain, I think the costs exceed the benefits. That's why the BOJ will probably hold off on (further easing) for as long as possible," she said.
If it were to act again, the BOJ will boost buying of government bonds instead of risky assets, because loading up on the latter could expose its balance sheet to potentially huge losses, Suda said.
"If the BOJ's main policy goal is to expand base money, it needs to expand the quantity of asset purchases and that would mean (buying) government bonds."
Another option would be for the BOJ to clarify how long it will maintain its current stimulus program, she said, a point the central bank now keeps intentionally vague to leave itself policy wiggle room.
NO DEFLATION IN EUROPE
While Japan eyes a gradual exit from deflation, other major central banks, notably the European Central Bank, has been debating the risk of subdued demand and low inflation turning into deflation.
But Suda said she did not expect Europe to enter deflation - defined as two straight years of price falls - and that fretting too much about a Japan-style deflation was counter-productive.
"Everyone in Europe is talking about the risk of deflation and how it's important not to become like Japan. But fretting too much about deflation could hurt sentiment," she said.
Suda, who still keeps contact with incumbent policymakers, took part in the BOJ's decision to adopt the previous spell of quantitative easing in 2001 and the termination of it in 2006.
She also worked with previous Governor Masaaki Shirakawa in battling big shocks to the economy, such as the fallout from the collapse of Lehman Brothers in 2008 and the March 2011 deadly earthquake and tsunami that hit Japan.
Suda defended Shirakawa's incremental approach in expanding stimulus as a reasonable way to deal with risks when economic uncertainty was high. She also said the BOJ must not shy away from debating how to exit from its massive stimulus when inflation hits its price target.
"If the BOJ is so convinced that it can achieve its price target, it surely ought to be thinking now about how to exit from its stimulus," she said.
(Additional reporting by Sumio Ito; Editing by Edmund Klamann and Jacqueline Wong)