By Max Sato
(MaceNews) – Bank of Japan Governor Kazuo Ueda said it is “appropriate” to continue seeking stable and sustainable 2% inflation under the bank’s yield curve control policy framework, indicating that there will be no major change to the current monetary easing stance at the April 27-28 meeting.
He told an inaugural news conference at the bank’s head office late on Monday that the framework, which was adopted in September 2016, is designed to “form what is considered to be the most appropriate yield curve for the economy while paying attention to market functions.”
“Given the current economic, price and financial conditions, I think it is appropriate to continue (the framework),” he said.
Ueda acknowledged that the negative interest rate policy, which was adopted in January 2016, has been squeezing lenders’ profit margins, although pointing to measures that are designed to minimize its side effects. “Under the assessment that the underlying inflation rate has not reached 2%, I think it is appropriate to continue (the negative rate policy).
Asked about an eventual exit from easing, the new governor said the bank “will have to normalize its policy at an appropriate timing if it is judged that 2% inflation is being achieved in a truly stable and sustainable manner.”
“On the other hand, if it proves to be difficult (to achieve 2% target), we will make a proper judgement on exploring for a more sustainable monetary policy framework while paying attention to side effects,” he added.
Ueda, the first academic to lead the BOJ in its modern history, began his five-year term on Sunday. For decades, the top position has been held by either former senior Ministry of Finance officials like his predecessor Haruhiko Kuroda, or career central bankers like Masaaki Shirakawa, who was in office from 2008 until 2013.
The two deputy governors – Shinichi Uchida, a career central banker who has been directly involved in crafting a series of monetary easing programs, and Ryozo Himino, a former Ministry of Finance official with financial industry supervision experience – took office on March 20.
The three had a brief meeting with Prime Minister Fumio Kishida on Monday evening, confirming plans to maintain close policy coordination to cope with the uncertain economic outlook under the policy accord signed between the government and the BOJ in January 2013, three months before Kuroda launched an “unprecedented” large-scale monetary easing program.
Emerging from the meeting, Ueda told reporters at the Prime Minister’s Official Residence that the BOJ leadership agreed with Kishida that “there is no immediate need to review” the Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth.
At the time, the BOJ adopted a clear 2% inflation target, a drastic shift from its previous stance that it should seek 1% inflation for the time being, with the longer-term goal of stabilizing price rises at 2% or lower in mind. The government vowed to revitalize the economy with deregulation, growth strategies and “flexible” fiscal spending, but also promised to establish a “sustainable” public finance structure.
At Monday’s news conference, Ueda urged the government to help raise the economy’s growth potential, saying monetary policy can work only on the demand side.
“I think the effects of monetary easing may be augmented if government measures to raise productivity are provided as an incentive to increasing capital investment,” Ueda said.
Ueda said the 2% price stability target is “not an easy target, particularly when there is an external shock” and declined to set a timeframe for achieving it.
At its latest meeting on March 9-10, the BOJ’s nine-member policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to support gradual economic recovery and guide inflation toward stable 2%.
Since December, the bank has been allowing the yield on the 10-year Japanese government bonds to rise to 0.5% from the previous cap of 0.25% amid upward pressures arising from last year’s aggressive tightening by other major central banks, hoping to revive some of the paralyzed market functions under its yield curve control regime.
The BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit,” and to keep the overnight interest rate at minus 0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.
The March meeting was the last one for Kuroda, who had led the bank’s large-scale monetary easing campaign for nearly 10 years based on the central bank’s policy coordination agreement with the government as part of a reflationary Abenomics policy mix of aggressive monetary easing, flexible fiscal spending and growth strategies, the last of which is still taking time to shape.
BOJ policymakers were initially successful in boosting zero inflation to end 15 years of deflation but have had a tough time keeping the momentum, first hit by a plunge in crude oil prices from 2014 to 2016 and the lingering drag from the sales tax hike from 5% to 8% in 2014. They also blamed the deflationary mindset among households and businesses. The bank is still in pursuit of stable 2% inflation that comes with sustainable wage hikes and economic growth.