Reflationist BOJ deputy happy with current pace of easing

TOKYO (Reuters) - The Bank of Japan can heighten inflation expectations by patiently maintaining its ultra-easy policy, deputy governor Masazumi Wakatabe said, in a sign the reflationist-minded newcomer won’t call for additional stimulus any time soon.

Bank of Japan (BOJ) new Deputy Governors Masazumi Wakatabe (R) and Masayoshi Amamiya attend their inaugural news conference at the BOJ headquarters in Tokyo, Japan, March 20, 2018. REUTERS/Toru Hanai

Wakatabe also said he was mindful that the risks of prolonged easing, such as the damage that years of low rates inflict on financial institutions’ profits, could accumulate.

“The merits and demerits of the BOJ’s monetary policy change over time,” Wakatabe told parliament on Monday.

“We need to be mindful of the danger, or risk, a prolonged low-interest rate environment would weigh on bank profits and that such impact could accumulate,” he said.

A former academic known as a vocal advocate of aggressive easing, Wakatabe had said in the past that the BOJ should act as consumer prices were not rising quickly enough.

That has led some analysts to speculate that Wakatabe, who joined the BOJ board last month, could propose ramping up stimulus in coming months.

During Monday’s appearance, however, Wakatabe said the BOJ’s current easing has already brought many benefits to the economy, such as creating jobs.

“Inflation has yet to reach our 2 percent target but price growth is on an upward trend,” Wakatabe said.

“By patiently maintaining our current policy, we can heighten inflation expectations” that will lead to a natural increase in longer-term rates, he said.

Wakatabe said the BOJ had the tools to either expand and dial back stimulus, brushing aside concern that its radical money printing experiment could lead to runaway inflation.

“Even if for some reason inflation accelerates rapidly, we have the tools to deal with it,” he said.

The BOJ will conduct a quarterly review of its growth and inflation forecasts at a rate review on April 26-27. It will be the first time Wakatabe and Masayoshi Amamiya, the other new deputy governor, will make projections as board members.

Under its yield curve control policy, the BOJ guides short-term rates at minus 0.1 percent and the 10-year government bond yield around zero percent via aggressive asset purchases.

While inflation remains distant from the BOJ’s target, many BOJ policymakers are wary of ramping up stimulus given the rising risks of keeping policy too easy for too long.

That means any proposal made by Wakatabe to expand stimulus will likely be turned down by the board, though it could shift market perceptions the BOJ’s next move will be to whittle down - not increase - stimulus.

Reporting by Leika Kihara; Editing by Chris Gallagher and Kim Coghill