January 19, 2015 / 8:57 AM / 4 years ago

'Abenomics' architect says no need for more BOJ easing

TOKYO (Reuters) - The Bank of Japan does not need to ease monetary policy further this year unless the economy is hit by a severe external shock, a ruling party lawmaker and one of the architects of Prime Minister Shinzo Abe’s “Abenomics” policies told Reuters on Monday.

Japan's ruling Liberal Democratic Party lawmaker Kozo Yamamoto speaks during a seminar hosted by Thomson Reuters at the Thomson Reuters office in Tokyo June 24, 2013. REUTERS/Issei Kato

The central bank stunned markets by expanding its stimulus program in October last year to try to prevent slumping oil prices, and a subsequent slowdown in price growth, from delaying the achievement of its 2 percent inflation target.

Since then oil prices have fallen by a further 50 percent and consumer inflation has gone below 1 percent, keeping the BOJ under pressure to ease again.

Kozo Yamamoto, a leading expert on monetary policy in Abe’s ruling Liberal Democratic Party, said a hit on consumption from a sales tax hike, along with the drop in oil prices, mean the central bank is unlikely to meet its inflation target during the fiscal year beginning in April.

But in the absence of sudden external shocks, the BOJ does not need to expand its stimulus again this year because the effect of its monetary easing in October last year should start boosting the economy by around this summer, he said.

“What more can the BOJ do? I think the central bank can hold off on action and take a wait-and-see stance for the time being,” Yamamoto told Reuters in an interview.

The BOJ’s stimulus program, dubbed “quantitative and qualitative easing” (QQE), was among the three arrows of “Abenomics,” a mix of stimulus policies and a growth strategy to unshackle the economy from 15 years of deflation.

The remarks by Yamamoto, a close aide to Abe, suggest the government does not feel an imminent need to pressure the central bank into offering another fresh stimulus.

“Japan will probably see inflation hit 2 percent in fiscal year 2016,” he said, adding that lower fuel costs will allow households to spend more on other items, keeping the economy in “very good shape.”

While the government may officially declare an end to deflation next year, the BOJ must refrain from exiting QQE until well into 2017 to ensure Japan does not slip back into stagnation, Yamamoto added.

STRONG TRACK RECORD

A vocal advocate of aggressive monetary stimulus, Yamamoto had told Reuters in a previous interview on Oct. 8 that the BOJ needed to deploy additional stimulus to ease the pain from a sales tax hike in April last year. He also said Abe should delay a second tax hike, initially scheduled for October 2015.

Both proposals became true. The BOJ expanded QQE three weeks later and Abe postponed the second tax hike by 18 months.

At a two-day rate review ending on Wednesday this week, the BOJ is likely to cut its consumer inflation forecast for the next fiscal year below 1.5 percent, reflecting the fall in oil costs.

Instead of quickening the pace of asset purchases under QQE again, the BOJ may expand the size of two loan programs aimed at encouraging banks to boost lending and extend their deadline beyond March, sources say.

Editing by Rachel Armstrong

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