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By Hiroshi Inoue and Max Sato
     TOKYO (MNI) - The Bank of Japan should start normalizing its aggressive
monetary policy to minimize its side-effects and the opportunity for doing so
may come when there is a change in government or central bank leadership,
Takahide Kiuchi, whose five-year term on the board ended just over two weeks
ago, told Market News International.
     Kiuchi didn't say when that could happen but amid falling public support
for the cabinet of Prime Minister Shinzo Abe, there is uncertainty over Abe's
bid for a third term as the ruling party leader, and thus prime minster, in
September 2018. The five-year term of BOJ Governor Haruhiko Kuroda ends in April
     Kiuchi also told MNI in an interview Monday that BOJ senior officials and
staff are likely to come up with a plan to gradually unwind the central bank's
large-scale monetary stimulus -- changing the bank's target for controlling the
long-term bond yields to a range of 3 to 5 years from the existing 10 years.
     He accused the BOJ of being too focused on achieving 2% inflation, which he
and some other economists believe is too high for Japan's growth potential,
while the government is trying to keep some distance from the target as
households face the risk of a continued rise in the cost of living even as wage
hikes remain low.
     "If the favorable inflation rate is determined by the economy's growth
potential, which is estimated somewhere between 0.5% and 1%, the corresponding
inflation must not be 2%, which is too high. I think it is even below 1%,"
Kiuchi said. "But as long as prices are stable, I don't see any problems. The
current level near zero is within a suitable range."
     Kiuchi disagrees with the BOJ's reasons for seeking 2% inflation -- the CPI
statistics have an upward bias, the central bank needs to secure a safety margin
for preventing the economy from slipping back into deflation, and sticking to a
"global standard" helps stabilize foreign exchange rates.
     Since the 1980s, Japan's annual inflation rate has been 2.2 percentage
points below the average among the Group of Seven major economies, including the
period of Japan's asset bubble of the late 1980s, he noted.
     After his five-year term as a member of BOJ's policy-making board ended on
July 23, Kiuchi returned to Nomura Research Institute as an executive economist.
     Kiuchi and Takehiro Sato, his fellow former private-sector economist, were
the last remaining dissenting voices on the nine-member policymaking panel,
which adopted an explicit 2% inflation target in January 2013 under political
pressure and began aggressive monetary easing under a new reflationary governor
three months later.
     "The BOJ is losing is good tradition of monitoring both the benefits and
costs (of its policy) and trying to cope with side-effects when they
materialize, which may be too late if the shock to the economy is huge," Kiuchi
     The BOJ is taking a "high-pressure economic" policy stance inherited from
the U.S. Federal Reserve, he said, allowing overheating of the economy and
highlighting only the positive side of labor shortages which BOJ officials say
will prompt firms to invest in equipment aimed at making their operations more
     "I think a high-pressure economic policy, allowing overheating of the
economy, is wrong. I'm concerned about how things are evolving here," he said.
     If the corporate outlook for economic growth falls in the face of serious
labor shortages, it will exert downward pressure on prices, undermining the
BOJ's efforts to overcome deflation and achieve stable 2% inflation, he noted.
     Japan is behind in normalizing its aggressive monetary policy. It could
have begun unwinding massive asset purchases and adjusting super-low interest
rates even before the Fed started tapering in late 2014, he argued.
     "We always have to check what stable prices are. The favorable price level
can change in line with the economy's growth potential," Kiuchi said. "A 2%
inflation target cannot be left alone forever."
     Before Prime Minister Shinzo Abe was returned to power in late 2012 with an
election campaign promising to overcome deflation and revitalize the economy,
the BOJ had a loose "goal" of pushing up inflation to 1% initially, within the
desirable inflation range of zero to 2%. Listening to economists who favor a
reflationary policy approach, Abe believed that massive cash injection into
financial markets could turn price drops into a 2% rise.
     In January 2013, in exchange for central bank independence, the then
governor, Masaaki Shirakawa, agreed to clearly "target" 2% inflation but on
condition that the government should work on structural reforms and formulate
pro-growth measures, supporting innovative investment by the private sector.
     Haruhiko Kuroda, a former senior Ministry of Finance policymaker who is
sympathetic to Abe's approach, took over from Shirakawa. Kuroda's surprise
launch of massive asset purchases in April 2013 caused an initial euphoria over
the weaker yen and higher share prices. However, the BOJ's aggressive easing,
combined with increased fiscal spending, has failed to completely overcome price
drops in the face of the stubborn deflationary mindset among households and
businesses as well as the 2014 plunge in crude oil prices.
     "Initially the general public supported the BOJ on one point -- overcoming
deflation -- but they didn't have a clear image of life under 2% inflation,"
Kiuchi recalled. "The definition of overcoming deflation among ordinary people
is to see their livelihoods improve in terms of employment and income."
     The public support for the BOJ faded in 2014 as it became obvious that
simply pursuing a 2% inflation goal would not come with a steady increase in
wages, he said.
     "The government is not insisting on 2% inflation. It is obviously not
helping the BOJ when it allowed mobile carriers to lower communications fees,
which is adding downward pressure to consumer prices," Kiuchi said. "Government
leaders don't want the BOJ to say it has failed to achieve 2% inflation but want
to see an adjustment of the target to a medium- to long-term target."
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email:
--MNI BEIJING Bureau; +1 202-371-2121; email:
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