BOJ's Iwata says conducting simulation on exit strategy from stimulus

TOKYO (Reuters) - Bank of Japan Deputy Governor Kikuo Iwata said on Tuesday the central bank was conducting a study of how it could end its massive monetary stimulus in the future, but acknowledged it was still far from achieving its inflation target.

Bank of Japan's (BOJ) Deputy Governor Kikuo Iwata poses for a photo after an interview with Reuters at the BOJ headquarters in Tokyo June 24, 2013. REUTERS/Toru Hanai

Iwata, speaking in parliament, said the BOJ did not want to publicise the exit-strategy simulation because doing so would cause market confusion given that its 2 percent price goal remains distant.

“The BOJ is carrying out a simulation based on several assumptions of an exit strategy,” Iwata told a financial committee in Japan’s upper house, in response to a question from an opposition lawmaker.

He added the BOJ would refrain from making the details of the simulation public as that would cause market confusion at a time when the central bank is some way off achieving its 2 percent inflation target.

Market showed little reaction to Iwata’s remarks.

Izuru Kato, chief economist at Totan Research, said Iwata’s comments were a direct response to a question in parliament, not a message about imminent policy intentions.

He noted Iwata has made similar comments in the past.

“Iwata does not want to discuss an exit because doing so could fuel concerns about a potential loss incurred to the BOJ’s expanding balance sheet, which would cost taxpayers’ money eventually, and prompt public criticism against the BOJ policy,” he added.

The BOJ holds its monetary policy meeting on Wednesday and Thursday and is not expected to change its policy settings.

Last week, BOJ Deputy Governor Hiroshi Nakaso said the central bank has been internally debating what tools it can use when it eventually ends its unconventional monetary stimulus program.

When the BOJ introduced its quantitative easing policy in 2013, its holdings of Japanese government bonds rose at an annual pace of 80 trillion yen.

Since then, the BOJ has loosened its commitment to this target and focused on controlling short- and long-term yields instead.

There are major concerns among some economists about the difficulties the BOJ may face in reducing its extremely large holdings of government debt and about how it will manage money market operations to control liquidity.

The challenges associated with unwinding the massive monetary policy stimulus global central banks have unleashed in recent years have drawn renewed attention.

Reporting by Tetsushi Kajimoto; Editing by Chris Gallagher and Sam Holmes