MNI INTERVIEW: BOJ’s 2% Target Isn’t “Appropriate” - Yamamoto

The Bank of Japan’s 2% inflation target isn’t appropriate, and the next governor should assess whether it should be changed as the easy money policies deployed to achieve it have delayed structural reforms needed to boost productivity and wages, former BOJ executive director Kenzo Yamamoto told MNI.

Critical of the scale of the BOJ’s bond purchases and suppression of market forces in determining the 10-year bond yield, he said easy money policies had allowed the government to borrow more and unproductive companies to survive, which was undermining the achievement of its inflation target.

“The BOJ needs to review the policy framework not only to increase the flexibility of monetary policy but also to restore market functioning, even before the 2% price target is achieved. The BOJ must undertake them in sets and clarify that it will not aim to tighten policy,” said Yamamoto, who is now the representative for KYinitiative.

If the BOJ continues to link the definition of its inflation target to it being delivered in a stable and sustainable manner, the 2% price target will not be achieved, he said, adding that easy money was impeding steps to raise the “metabolism” of the economy.

“The BOJ should consider whether it is appropriate to maintain the current policy and to aim to achieve the 2% target despite accumulating side-effects and delaying [a rise in] metabolism,” he said. (See MNI BOJ WATCH: Closer To 2% Target, But Easy Policy Remains)

“The BOJ should examine the validity of its 2% price target in Japan as there has been about a 2% price gap between the U.S. and Japan in the past 40 years (from 1978 to 2020 excluding sales tax hikes),” implying the inflation target should be lower.

Retail prices haven’t been raised sufficiently as low productivity firms can survive due to government subsidies and BOJ easy policy, he said. “Under the existing conditions, an appropriate price level in Japan isn’t 2%.”

He said the BOJ had added an extra dimension to its inflation target by linking its success to wage hikes. The bank has claimed its policies are helping drive wages hikes, yet the bank doesn’t target wage growth. (see MNI POLICY: BOJ Studies Inflation Risks; Wages In Focus)

BOND BUYING

Yamamoto said the BOJ had increased the scale of its purchase of Japanese government bonds without considering the consequences and restricted JGB yield moves thoughtlessly.

“Unless the BOJ tackles the side-effects squarely, the [rise in] metabolism will be further delayed and productivity will fall and wages will not rise,” Yamamoto said.

“The biggest side-effect is that fiscal discipline has gone as the BOJ’s easy policy has been making it easy for the government to issue bonds without a limit to ensure subsidies,” he said.

Yamamoto said the BOJ should leave long-term interest rates to be determined by the market. However, he said the BOJ was unlikely to suspend its purchases. “The BOJ has been controlling the long-term interest rates for a prolonged period. The BOJ will have to buy JGBs when bond yields rise sharply.”

The BOJ’s easy policy had promoted investment in foreign bonds, stocks and real estates, but financial institutions had incurred huge unrealised losses as a result of the rise in interest rates overseas, he said. “The BOJ will face the similar problems in the future.”

“As a result, the functioning in JGBs had fallen significantly and the big question is when will the BOJ take it seriously,” Yamamoto said.

Yamamoto said the scale of BOJ’s balance sheet shows the degree of its intervention in financial markets. The current account balances at the BOJ totalled about JPY490 trillion, far above the minimum necessary amount of about JPY20 trillion-JPY30 trillion, highlighting the BOJ’s impact in the bond market and on market moves.