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By Hiroshi Inoue and Max Sato
During his tenure on the BOJ board, Kiuchi continued to warn against the
side-effects of aggressive easing. He voted against the adoption of a
controversial negative interest rate policy in January 2016 and opposed shifting
the policy target to yield curve control from asset purchases in September 2016.
Since April 2015, he also continued to propose that the BOJ slow the annual
pace of its purchases of Japanese government bonds to Y45 trillion from Y80
trillion. He was one of the four board members who voted against the governor's
proposal to raise the pace to Y80 trillion from a range of Y60 to Y70 trillion
in October 2014.
"It is hard for central banks to take preemptive action," Kiuchi said.
"Adjustments to monetary policy tend to come when hit by large shocks, such as
sharp fluctuations in global interest rates, adverse effects on profitability of
financial institutions or an economic slump."
"But before these shocks, there may be an opportunity for the Bank of Japan
staff and senior officials to prepare a shift to a more flexible policy if there
is a change in government or BOJ personnel," he said, but added that there is
great uncertainty if -- and if so, when -- this might happen.
Kiuchi remains opposed to targeting the overnight interest rate at -0.1%
and the 10-year JGB yield at zero percent under the yield curve control policy
framework. But he also said the BOJ's shift to yield curve control from asset
purchases was "a kind of normalization process."
By retaining yield curve control, BOJ officials may propose to the board
changing the bank's long-term bond yield curve target to a range maturities
between 3 and 5 years from the existing target of 10 year yields, he said.
"The board hasn't discussed it. But I think the BOJ needs to shorten the
duration of the Japanese government bonds it holds," Kiuchi said.
"As long as the BOJ keeps the 10-year target, it has to buy long-term bonds
(to keep the yield at around zero percent). This means it takes a long time for
the BOJ to reduce the size of its balance sheet when it implements an exit
At its latest policy meeting on July 19-20, the BOJ board decided to leave
its monetary policy unchanged in a seven-to-two vote, with Kiuchi and Sato
dissenting. The BOJ retained the yield curve control target, while pushing back
its estimate for achieving its 2% inflation target by a year until "around
fiscal 2019." It was the sixth delay since the central bank launched aggressive
easing in April 2013.
Kiuchi pointed out that if the BOJ shortened the duration of the bonds it
holds, it would shorten the period of an eventual exit from large-scale monetary
stimulus and also help lower term premiums paid for liquidity as well as price
fluctuation risks of holding longer-term bonds.
The BOJ has admitted that interest rates between three and five years have
a strong impact on commercial bank's lending rates.
"I believe that the BOJ cannot control long-term interest rates. Also, as
long as the BOJ continues to keep the 10-year target, the BOJ cannot use forward
guidance (on its monetary policy intentions)," Kiuchi said.
Even if the BOJ were to provide forward guidance under the 10-year yield
target, the market would not take it seriously as 10 years are too long a period
to provide accurate projections on the economic outlook and direction of
monetary policy, he said.
Kiuchi declined direct comment on whether there is a difference between BOJ
staff and the board on the BOJ's median projection for inflation.
But he said, "I have a feeling that the staff's forecast for inflation has
a relatively big influence on the board's median inflation forecast. The impact
of the staff's inflation forecast on the board members who expect lower
inflation (than the median) isn't so big."
The BOJ board's median forecasts for economic growth and inflation are
based on a report prepared by BOJ economists but the BOJ has never disclosed the
Kiuchi added that BOJ economists who provide data to the board in
forecasting GDP and CPI are "keeping the objective of monetary policy in mind,"
which means they appear to be influenced by the bank's effort to guide near-zero
inflation to 2%.
Kiuchi warned that the BOJ is not watching closely enough for the costs of
its aggressive easing.
The BOJ assesses the economic and price conditions from two perspectives
and then outlines its thinking on the future conduct of monetary policy.
The first perspective concerns an examination of the baseline scenario for
the near-term outlook. In the second perspective, the BOJ is supposed to take
the risks and side-effects of its policy into consideration from a long-term
viewpoint. However, Kiuchi said, these days the board is only focused on
economic and price moves for its projection period of three years, not the
Back in October 2007, when the BOJ was struggling to pull prices from
slight drops while normalizing monetary policy with gradual rate hikes, it said
in its Outlook Report, "Companies continue to restrain the pass-through of cost
increases into sales prices longer than assumed through their cost-saving
efforts and productivity improvements. Under this case, prices may not easily
respond to a sustained expansion of the economy."
"At the point when prices finally respond and start to increase, the
economy may already have seriously overheated and the price formation of various
assets may have been distorted in some way. If this were to happen, swings in
economic activity could eventually be larger, reflecting excessive financial and
economic activity and its subsequent adjustment."
Kiuchi said, "The board is trying to boost prices through an overheated
economy. But the BOJ should seek to maintain stable economic growth with its
monetary policy as an overheated economy would eventually destabilize the
The BOJ's massive JGB purchases is distorting bond prices, impairing the
intermediation in financial markets and increasing the risk that the BOJ will
incur portfolio losses, he warned. It is also equivalent to fiscal financing,
which, in turn, would increase the risk premium on government bonds, he added.
"If the BOJ continues to buy JGBs at an annual pace of Y80 trillion, the
side-effects would become serious and the BOJ would not be able to maintain
yield curve control," Kiuchi said.
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