Ex-BOJ Iwata: BOJ must cut key rate to -1.0 percent to beat deflation

TOKYO (Reuters) - The Bank of Japan must lower its minus 0.1 percent interest rate to about minus 1.0 percent for the country to conquer deflation, a former deputy governor at the central bank said on Thursday.

Kazumasa Iwata, former deputy governor of the Bank of Japan, poses for a photo after an interview with Reuters in Tokyo September 3, 2012. REUTERS/Toru Hanai

The BOJ should make negative interest rates its main policy tool because it is difficult to further expand government debt purchases due to losses the BOJ is incurring on these investments, former BOJ Deputy Governor Kazumasa Iwata told reporters.

Households and commercial banks have criticized the BOJ’s negative rate policy for placing an excessive burden on savers and the financial system, underscoring the daunting challenge faced by the central bank in its quest to cast off deflation.

“For Japan to achieve its mission of completely escaping deflation, the BOJ has to consider further expansionary policy,” mainly through further lowering the interest rate, said Iwata, now president of the Japan Center for Economic Research.

The BOJ in January decided to begin charging 0.1 percent interest on some bank reserves parked with the institution, in a bid to kick-start the economy and pull it out of two decades of deflation.

The BOJ’s next two-day policy review ends on April 28. Policymakers will likely debate the possibility of easing monetary policy further at this meeting, sources familiar with their thinking told Reuters earlier this month.

BOJ Governor Haruhiko Kuroda has indicated that expanding purchases of exchange-traded funds (ETFs) could be one option to lower risk premiums and try to ignite inflation.

Iwata, however, said it is not “favorable” for central banks to buy ETFs when stock market prices are relatively good.

Under the current program introduced in April 2013, the BOJ buys 3.3 trillion yen of ETFs annually, much smaller than the 80-trillion-yen per year in purchases of government bonds.

The central bank added negative interest rates to its quantitative and qualitative easing program in January as inflation remains distant from its 2 percent price target.

Some economists say negative interest rates have backfired, because it reinforces the perception that the BOJ does not have much leeway to expand government debt purchases further.

Editing by Chris Gallagher & Shri Navaratnam