MNI INTERVIEW: Ex-BOJ Off'l: BOJ Easy Policy Impedes GDP Gains

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan's monetary policy stance has been holding

back an increase in GDP and is an impediment to potential future growth, a

former senior BOJ official told MNI this week.

     "The prolonged easy policy is enabling firms to implement less profitable

capital investment. That eventually has been lowering total returns from capital

investment and hasn't been increasing capital input, which is lowering the real

economic growth rate," Takashi Kozu, the president of the Ricoh Institute of

Sustainability and Business, said in an exclusive interview.

     According to Kozu, the economy had undoubtedly improved on the back of the

BOJ's policy, but policymakers saw more room to boost growth and that had led to

the "prolonged" easy policy.

     "People don't want to admit it, but Japan seems to be entering a new and

indecent reality ... people have been wanting to further increase economic

growth and the BOJ has been strengthening its easy policy. But this continues

lowering economic growth rate," he added.

     While much is often said about the impact of easy policy on the poor

profitability at commercial, the authorities should take greater notice of the

effect it has had on capital investment and the lowered returns, which has

weighed on economic growth, Kozu said.

     There is still capital investment, including software upgrades, R&D and

measures to help ease the issues from the continuing labor shortages, but it is

unlikely to be a driving force for economic growth and this is a side-effect of

the easy policy, he said.

     Kozu analyzes that real GDP consists of four elements that make up the

production factors; real wages, labor input, capital input and real capital

return. But the connection is broken.

     "Unless capital input increases, real gross domestic product will not

rise," Kozu said, adding that the BOJ should review the theory that lowering

interest rates stimulates demand and boosts economic growth.

     In 1980s, Japan's real GDP rose to around 4% as capital input helped boost

GDP, according to Kozu's estimates. But in 2010s, capital input has fallen

sharply, lowering real GDP, he argued.

     Japan's potential growth rate is estimated by the BOJ to be the range of

0.5% to 1.0% as the lack of rise in the total factor productivity is behind the

low rate.

     --YEN PRESSURE

     Kozu agreed with the view that upward pressure on the yen stemming from

short-term interest rate gap between the U.S. and Japan is lessened as Japanese

companies aren't repatriating overseas profits back into the yen, instead opting

for increased offshore capital investment rather than in Japan.

     The lack of a yen surge, through Y100 for instance, has been a stroke of

luck for the BOJ as they have not been forced into additional easing, Kozu,

said, although he believed they needed to look at why the yen hadn't

appreciated.

--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

[TOPICS: MMJBJ$,M$A$$$,M$J$$$,MT$$$$]