MNI INTERVIEW: BOJ Should Review 2% Target-Ex Senior Official

The Bank of Japan should review its unrealistic inflation target, as the excessively easy monetary policy it requires lowers productivity and erodes government fiscal discipline, a former BOJ executive director told MNI.

The price target, currently set at 2% year-on-year, could be made more flexible, and perhaps reshaped as a medium-, or longer-term objective, said Kenzo Yamamoto, who served at the BOJ until 2012 and is now the representative for KYinitiative. The BOJ should also drop its cap on yields of 10-year government bonds, currently enforced by unlimited daily fixed-rate bond buying operations, he said in an interview.

His comments came amid growing calls outside the BOJ to re-examine a policy framework which has been put under additional strain by U.S. monetary tightening, though there is little expectation of any change before Governor Haruhiko Kuroda concludes his term in April next year.

While the BOJ insists that the 2% target is a global standard, Yamamoto said it is doubtful whether it is appropriate for Japan, where with few exceptions increases in consumer prices have lagged U.S. inflation since 1978.

"The average price gap between the U.S. and Japan for the 29 years from 1993, when core Japanese CPI fell below 2%, until 2021 is estimated to be about 1.8 percentage points," he said, adding that Japanese inflation would only reach 2% when the rate of increases in U.S. prices was considerably higher.

DRAG ON PRODUCTIVITY

Japan is only likely to finally see core CPI at close to 2% around the summer due to supply-chain problems and surging import prices caused by the weak yen, which is an undesirable form of inflation, he said.

Excessively easy policy permits firms which would otherwise fold to continue to exist, eventually dragging down productivity, growth and wages, he argued. And, he added, while the BOJ has never underwritten public debt, the asset purchases required to maintain its yield curve framework have nonetheless eased constraints on government borrowing, eroding fiscal discipline.

"Despite economic growth, the 2% price target hasn't been achieved, which shows that the 2% target is too high," Yamamoto said, noting that the nine years of extraordinarily easy monetary policy since Kuroda took office at the BOJ in 2013 have failed to boost growth above the roughly 0.6% average seen in the preceding 10 years.

YIELD CAP

While removing the 10-year yield cap would restore market discipline, it would not necessarily prompt the rise in rates feared by the BOJ, as the economy is so fragile, said Yamamoto, who regards the current setting of the central bank’s main short-term policy rate at -0.1% as appropriate.

"I have no intention of saying that the BOJ should abandon the negative rate policy,” he said, but added that “the Bank should leave long-term interest rates to the market, in order to restore market function. It is very strange or stupid that the BOJ doesn't make use of market function.”

There is already mounting speculation that the BOJ will adjust its yield targeting framework, perhaps by raising the cap on the 10-year yield from 0.25%, in order to support the yen after its recent rapid depreciation. The currency has come under pressure as the U.S. raises rates, but the BOJ has stuck to its yield control framework in pursuit of its price goal. (See MNI INTERVIEW: Yen May Be Nearing End Of Depreciation-Hayakawa)

The BOJ, which insists a weaker yen is positive for the economy but has expressed concern about rapid changes in the exchange rate, has been inconsistent in its messaging on the currency, said Yamamoto.