March 7, 2018 / 4:41 AM / 3 months ago

BOJ deputy governor nominee says crafting new easing tool an option

TOKYO (Reuters) - The Bank of Japan can come up with new policy steps if it were to ramp up stimulus, said Masazumi Wakatabe, a nominee for deputy governor, in a sign the governor will have a formidable opponent of whittling down its massive bond-buying program.

Masazumi Wakatabe and Masayoshi Amamiya, the government's nominees for next Bank of Japan deputy governors, attend a confirmation hearing in the lower house of parliament in Tokyo, Japan, March 5, 2018. REUTERS/Toru Hanai

But Wakatabe said the BOJ did not need to persist with hitting its price goal at a set timeframe, and he had no preset idea on whether the economy needed more monetary support now, tempering expectations he might propose radical stimulus steps.

“The BOJ shouldn’t be bound by a set timeframe. Its policy should be data-dependent, not date-driven,” Wakatabe told an upper house confirmation hearing on Wednesday.

“There are various things the BOJ can do under its yield curve control policy. It can strengthen its existing tool kit, or could come up with a new policy,” said Wakatabe, a vocal advocate of aggressive easing.

Wakatabe and career central banker Masayoshi Amamiya spoke in parliament. They are the government’s nominees to become deputy BOJ governors when the posts become vacant on March 20.

Analysts say that while Wakatabe may discourage the BOJ board from debating an early exit from easy policy, he is unlikely to rock the boat with proposals of more easing as he would be mandated to assist - not disagree with - the governor.

“The hurdle is high for Wakatabe to propose easing. To do so, he must come up with very convincing arguments,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

Wakatabe said he would not persist in ramping up the BOJ’s bond buying - a proposal he had made as an academic - if he were to join the central bank.

“The BOJ’s existing framework already allows it to buy various assets and adjust its yield target,” Wakatabe said. “But that’s not it. There are other things it can do”.

Wakatabe did not elaborate on possible new steps, but said his focus would be on coming up with ways to change public perceptions that deflation will persist.

The BOJ’s first policy meeting under the new leadership will be April 26-27, when it will review its quarterly growth and inflation projections.

The government has reappointed Governor Haruhiko Kuroda for another five-year term when the current one ends in April. The nominations are set to be approved as premier Shinzo Abe’s ruling bloc has a comfortable majority in both houses.

OUT OF AMMUNITION?

Under a policy dubbed yield curve control (YCC), the BOJ pledges to guide short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent via purchases of government bonds and risky assets.

While inflation remains distant from its price goal, the BOJ has faced calls from some lawmakers to debate an exit strategy from ultra-loose policy, given the rising cost of prolonged easing such as the strain on bank margins.

Under the current forecast, the BOJ sees inflation reaching its 2 percent target during the fiscal year ending in March 2020 - a projection many analysts see as too ambitious.

Many BOJ policymakers, including Kuroda, see little need or room to ease further and feel their next step should be to whittle down stimulus.

Amamiya echoed Kuroda’s remarks on Tuesday that debate of an exit from easy policy won’t happen unless inflation hits his 2 percent goal, seeking to dispel speculation the BOJ will follow global peers in dialing back stimulus.

But he said the BOJ had the necessary tools to engineer a smooth exit and ruled out resorting to radical easing steps, such as direct underwriting of government debt.

Reflecting growing concern over the BOJ’s dwindling toolkit, Wakatabe and Amamiya kept mum on whether deepening negative rates could be among options if the central bank were to ease.

“Technically it’s possible to deepen negative rates. But all policies have merits and demerits that need to be taken into account,” Amamiya said.

The BOJ has said deepening negative rates is one tool available should it ease, though many analysts say doing so could backfire by destabilizing Japan’s banking system.

Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Jacqueline Wong and Richard Borsuk

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