MNI BOJ Wakatabe Eyes  Policy Strategy Review; Need Policy Mix

The Bank of Japan must think hard about what kind of monetary policy should be used in the Covid-19 era, Deputy Governor Masazumi Wakatabe said Wednesday, referencing discussions being held by other central banks globally at present.

However, Wakatabe offered no explanation or comment on how the BOJ should review its current monetary policy framework.

"In September 2016, in particular, the BOJ made a comprehensive assessment mainly based on experiences related to monetary policy conducted until then and introduced 'Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control,' which is still conducted. Reflecting the current crisis, there will be further discussions on monetary policy," Watakabe told business leaders in Saga City via video conference.

He also expressed the view that although separate and fulfilling different roles, monetary and fiscal policy would need to be better coordinated ahead.

"It is essential for the governments and central banks to cooperate with each other in terms of fiscal and monetary policies, while fulfilling their respective roles, in order to address such economic crises as the current one. Basically, central banks can provide liquidity through lending but cannot spend money," he said.

Watakabe didn't say there was any near-term change expected in BOJ policy, but repeated the central bank's mantra that it will "closely monitor the (Covid-19) impact and will not hesitate to take additional easing measures if necessary".

RISKS

He was also cognizant of the risks the economy still faces through the pandemic and aftermath, saying Japan is "still in an extremely severe situation but economic activity has shown signs of a pick-up, although it remains at a low level. The spread of Covid-19 has not yet subsided globally and there are extremely high uncertainties over future developments."

The second risk factor is that, if the real economy remains depressed and the challenge for economic agents shifts from liquidity to a solvency problem, "a vicious cycle will emerge in which the real economy is pushed down further through the impact on the financial sector," he added.

"External shocks may persist due to the prolonged impact of Covid-19," he added, noting that if those shocks lead instability in financial markets or a financial crisis, "the current economic crisis may become more severe."

Watakabe also noted that deflationary pressure may be put on the economy "unless real interest rates are lowered in accordance with a decline in the natural rate of interest."

That said, Watakabe noted that Japan's economy is likely to improve gradually from the second half of this year." But "It will likely take time for economic activity to return to the pre-Covid-19 level."