TOKYO (Reuters) - The Bank of Japan must avoid a premature exit from ultra-loose monetary policy as it could hurt the economy and lead to huge losses on its balance sheet, Takatoshi Ito, an academic seen as a possible candidate for next BOJ governor, said.
The central bank is already laying the grounds for an eventual exit from its huge stimulus program by slowing its bond purchases, Ito told a seminar on Wednesday.
But the BOJ will likely not dial back its stimulus as long as inflation hovers below 1 percent, said Ito, a Columbia University professor considered a candidate to succeed Governor Haruhiko Kuroda when his five-year term ends in April next year.
“What’s important is for inflation to accelerate, which would give (the BOJ) quite some flexibility in guiding monetary policy,” Ito said.
“While inflation is hovering below 1 percent, it would be hard for the BOJ to exit” from ultra-loose policy, he said.
The comments suggest that Ito, who is known to have close ties with Kuroda, would sustain the status quo on monetary policy if he were to be chosen for the top BOJ job.
Ito said the BOJ could take a step toward withdrawing stimulus during the year ending in March 2020, when the central bank expects inflation to hit its 2 percent target.
Even so, it would take “another few years” for the BOJ to start raising its yield targets to normal levels, he said.
In the event of an exit, the BOJ can learn from the U.S. Federal Reserve by proceeding very slowly in scaling back its balance sheet and raising interest rates, Ito said.
“It’s wrong for the BOJ to rush in exiting ultra-easy policy for fear a delay in doing so could lead to big losses on its balance sheet,” he said.
“To minimize losses on its balance sheet, the BOJ must be very slow” in normalizing monetary policy, he added.
After three years of heavy asset purchases that failed to drive up inflation, the BOJ revamped its policy framework last year to one targeting interest rates from the pace of money printing.
The BOJ still maintains a loose pledge to buy bonds so its holdings increase by 80 trillion yen ($702 billion) per year.
But its buying has recently slowed to around 50 trillion yen, a move Ito described as “essentially a start of tapering.”
Ito said the BOJ must stick to its 2 percent inflation target, as any attempt to lower it could trigger an unwelcome spike in the yen that hurts Japan’s economy.
He added there was no need for the central bank to ramp up monetary stimulus because the economy was already in good shape.
Prime Minister Shinzo Abe’s election victory last month increases the likelihood an advocate of aggressive easing, such as Ito, will be chosen to continue Kuroda’s policy.
($1 = 113.9600 yen)
Editing by Chang-Ran Kim and Jacqueline Wong