MNI INTERVIEW: BOJ Must Amend Negative Rate Policy: Ex-Aide

By Hiroshi Inoue

     TOKYO (MNI) - With a growing number of central banks and international

financial bodies increasingly skeptical over the impact of negative interest

rate policy, the Bank of Japan must rethink its current framework, a former

senior Bank executive told MNI in an exclusive interview.

     Accepting there was potential for communication difficulties with the

financial markets, Hiromi Yamaoka, a former director-general of the Markets

Department and of Payment and Settlements Department, highlighted two ways the

BOJ could extract itself from its current policy.

     One option would be for the BOJ to stick with the 2% price target but

abandon its negative rate policy as "the side-effects (are) significant,"

Yamaoka said.

     "Another method is that the BOJ considers its 2% price target flexibly in

order to separate the price target from the negative rate policy," he added,

without elaborating on details.

     --COMMUNICATION

     The BOJ would need to strengthen its warnings to financial institutions

over excessive risk-taking before backing out of its negative interest rate

policy, he said.

     "If the BOJ unwinds the negative interest rate policy before achieving the

2% price target, it would have big shock on financial markets," Yamaoka added.

     "If the BOJ selects either option, the bank would need to drastically

change its policy framework, which in turn will have a big impact on markets.

The current conditions are making it very difficult to drastically change the

policy framework without in depth communication with market players," he said.

     --DEFAULT CONCERNS

     Yamaoka voiced his concern over accumulated side-effects of a prolonged

easy policy, including surges in asset prices and increased debts as negative

rates fuels excessive risk-taking. It will be too late for the BOJ to take

action after risks, such as default on loans, materialize, he said.

     With a domino-like effect, once defaults start, the numbers would quickly

pick up, undermining the stability of financial system, Yamaoka said.

     "Easy policy usually prompts market players to invest money in stocks and

risk assets but the BOJ must examine the degree of their risk-taking activities

and their future unwinding in a balanced manner," Yamaoka warned.

     "That's the core of monetary policy," he emphasized.

     --WARNINGS

     Yamaoka, now board a member at Future Corporation board, said that warning

on excessive risk-taking in the BOJ Financial System Reports doesn't go far

enough in warning on the side-effects of easy policy.

     "Macro-prudential policy should be implemented as 'forward-looking.' That's

the global common sense position," Yamaoka said, noting the BOJ has to assess

the future stability of financial system and soundness of commercial banks.

     "The BOJ has repeatedly said that banks have sufficient capital bases. That

is limited to current analysis, not a forward-looking assessment. The BOJ must

pay attention to how banks' capital evolves as it maintains the negative rate

policy until hitting the 2% price target," Yamaoka warned.

     According to Yamaoka, the BOJ should not view excessive risk-taking by

financial institutions as a beneficial upside of easy policy and its should be

careful how it analyses financial institutions lending data it sees in the

Tankan survey.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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