MNI INTERVIEW2: Japan Economy Standstill Risk: Ex-BOJ Momma

Japan's economy recovered through October but there is undoubtedly a risk that growth could slow if the virus is resurgent in Japan and globally, a former Bank of Japan chief economist said.

"Looking ahead, if infectious diseases increase, private consumption will mark time and the economy will fall into a standstill phase," said Kazuo Momma, now executive economist at Mizuho Research Institute, told MNI this week.

Momma added that the near-term focus is how the spread of the disease evolves and whether it restricts economic activities. Capital investment will likely fall sharply from a year earlier, he said, as it takes time to recover in line with the economy, he said.

"The BOJ's lending facilities are sufficient to cover corporate fund demand. Future focus is the recovery of corporate profits and sales in the coronavirus economy," Momma said. But he voiced concern over the impact of an increasing number of store closures on the labor market situation.

FISCAL POLICY VITAL

To help revitalize the labour market, Momma said the government should give support to people who are considering changing industry as at present it remains difficult.

"Fiscal policy remains necessary to prevent labor market conditions from sharply worsening and prevent downward pressure on the economy," Momma said.

He said the BOJ could certainly boost its lending programs to help with the recovery, but underlined that there was a limit to what the central bank could do and that fiscal policy needed to be the main lever.

CORPORATE CONCERNS

There is certainly an argument that businesses depend too heavily on government and the central bank policies right now, but there is no choice but to offer this support, he said.

The potential issues companies could have in coming months was partly behind the BOJ's decision to introduce the special deposit facility to support regional financial institutions and its concern over regional banks' profitability and the impact on the financial system.

"If the financial system destabilizes, it will weaken the transmission mechanism of monetary policy. Strengthening the financial system is inevitable (necessary?) to increase the transmission mechanism of easy monetary policy," Momma said.