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MNI (London)
--Ex-BOJ Hayakawa: A BOJ Policy Option is Negative Loans To Banks
By Hiroshi Inoue
     TOKYO (MNI) - Japan's economy is likely headed for recession, pushing
inflation back into negative territory and triggering the Bank of Japan into
additional easing policies, a former BOJ chief economist told MNI in an
exclusive interview on Monday.
     Japan's economy was slowing, but would likely mark time into the Summer,
supported by demand ahead of a planned October sales tax hike, but "will likely
fall into recession from the second half of this year toward the next year,"
Hideo Hayakawa, a former BOJ chief economist and currently senior executive
fellow at Fujitsu Research Institute, said.
     According to Hayakawa, the slowing economy and falling inflation will push
the BOJ into offering negative interest rate loans to commercial banks, one of
few options left to a central bank running out of policy tools.
     Officials in the BOJ's Monetary Affairs Department will need to draw up
strict guidelines regarding the implementation of negative rate loans to banks,
that will be viewed by some as bank subsidies.
     "BOJ's loans to banks at negative interest rate will be equivalent to a
subsidy to banks. But regional banks are facing a severe situation and loans at
negative interest rates will be understandable" as the central bank must
maintain the stability of the financial system, Hayakawa said.
     Hayakawa noted that the global economy is slowing and growth in the U.S.
will likely slow, pressuring Japan's exports -- unless there is an "unlikely"
solution to ongoing trade disputes.
     That would have a direct impact on the domestic economy and "capital
investment will surely slow down, judging from a build-up of capital stocks,"
Hayakawa said.
     The weaker economy will likely push core consumer price index into negative
territory this year, increasing pressure on the BOJ to consider additional easy
policy, he said.
     Japan's core consumer price index excluding fresh food rose 0.7% on year in
December, slowing from +0.9% in November, and core-core CPI excluding fresh food
and energy item rose only 0.3% in December.
     Hayakawa predicts core CPI to slow gradually, before falling into negative
territory later this year, as the impact of lower crude prices and the scheduled
October launch of free pre-elementary education will reduce core CPI by 0.6
percentage point.
     He added that the BOJ still has time before implementation of additional
easy policy, as -- to date -- there has not been a noticeable worsening of
economic fundamentals and inflation rate through data.
     However, monetary policy officials under Deputy Governor Masayoshi Amamiya
are looking closely at how best to cope with downside risks to economic activity
and prices," Hayakawa said.
     Hayakawa said that the BOJ's July 2018 decision to tolerate greater
fluctuations in 10-year JGB yields was part of a framework for higher rates in
the future.
     "The BOJ assumed the economy will continue to expanding for a while,
inflation rate is stable at around 1% and U.S. long-term interest rate continued
rising based on its rate hike mode."
     "However, the assumption (now) completely collapses," making it difficult
for the BOJ to raise the 10-year interest rate -- and the wider trading band is
not as useful if additional easing in needed.
     The March BOJ Tankan will be closely eyed by central bank officials to see
how fiscal 2019 capital investment plans are looking, with Hayakawa saying
capital investment plans in fiscal 2019 "will be weak, judging from a build-up
of capital stocks". 
     BOJ officials will likely await the revised plans in the June Tankan
release, as they offer a more reliable guide to corporate investment plans.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
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