MNI INSIGHT: BOJ's Cautious Easing To Stay Despite New Blood

By Hiroshi Inoue 

     TOKYO (MNI) - Prime Minister Shinzo Abe is sending another reflationist to

the Bank of Japan policy board but the central bank will maintain its cautious

monetary easing stance, according to sources familiar with BOJ thinking.

     Pending parliamentary approval, Governor Haruhiko Kuroda will serve his

second five-year term after the aggressive easing he launched in April 2013 has

failed to boost inflation to a stable 2%, hit by a plunge in crude oil prices

and the stubborn deflationary mindset held by firms and households. His current

term ends on April 8.

     In his recent remarks, Kuroda has stressed that the bank is watching the

side-effects of large-scale monetary stimulus, which is squeezing lender

profits. It has also led to very low returns on investments in Japanese

government debt and corporate bonds, hurting pension funds and causing life

insurers to shift to riskier higher-yielding foreign securities.

     -- STAYING ON COURSE

     Kuroda's cautious approach will be supported by Masayoshi Amamiya, dubbed

"Prince" and "Mr. BOJ." Amamiya will be promoted to one of the two deputy

governors from executive director in charge of monetary policy. He has drafted

aggressive easing measures and has been playing a main part in policy decisions

for more than 20 years.

     The government has also nominated Masazumi Wakatabe, an economics professor

sympathetic to Prime Minister Abe's reflationary policy mix, to the other deputy

governor.

     Wakatabe has testified during his confirmation Diet hearings that he does

not believe the side-effects of aggressive easing have emerged. He has argued

for raising the BOJ's annual pace of Japanese government bond purchases from the

current Y80 trillion to Y90 trillion and broadening the range of financial

assets that the bank buys.

     Amamiya, 62, and Wakatabe, 52, will replace Hiroshi Nakaso, a career

central banker, and Kikuo Iwata, a reflationist former economics professor.

Their five-year terms end on March 19.

     -- DEPUTIES MAY DISAGREE

     As for the conduct of monetary policy, any conflict between Amamiya and

Wakatabe is unlikely to emerge as long as the Japanese economy continues

recovering, a former senior BOJ official who spoke on condition of anonymity

told MNI.

     The person, however, said, should concern over a serious economic downturn

increase or should the yen rise sharply, the two men would be divided over

whether the bank should conduct additional easing or in that case, what policy

tools -- asset purchase or interest rates -- should be used.

     While Amamiya has been playing a key role in policy shifts, first to

massive asset purchases in 2013 and then to yield curve control in 2016, he

thinks the BOJ's quantitative easing has had little effects on growth and

inflation amid the shrinking workforce, and thus the number of consumers, three

sources who are familiar with the BOJ policy-making process told MNI.

     Amamiya fully supports Kuroda's view that additional easing isn't necessary

as long as the momentum toward achieving the 2% price stability target is

maintained, they said.

     Even if the BOJ's often-delayed estimated timing of hitting the 2%

inflation target is pushed back again from the current estimate of "around

fiscal 2019," that factor alone would not prompt the bank to conduct additional

easing, Kuroda has said.

     On the other hand, Wakatabe is a reflationist usring expanded monetary

easing to overcome deflation but his argument may be outdated. He is focused on

quantitative easing while the BOJ has shifted its easing target to interest

rates.

     Wakatabe is also calling for continued fiscal stimulus. He has proposed

delaying the government plan to raise the sales tax further to 10% from the

current 8% in October 2019.

     MORE

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$,MGJ$$$]