MNI INTERVIEW: Ex-BOJ's Yamamoto Urges Swift Asset Reductions

The Bank of Japan must swiftly enact a programme to reduce the balance of its Japanese government bond holdings to help guide the market and avoid destabilisation should more rapid rate hikes prove necessary, a former BOJ executive director told MNI.

Balance sheet normalisation that brings its scale back to a level slightly above the required reserves, including the balance of banknote issuance, could take at least nine years and would entail the BOJ lowering bond holding by JPY440 trillion from about JPY600 trillion, noted Kenzo Yamamoto, now the representative for KY Initiative.

The lack of a formal progamme to run down the BOJ’s balance sheet increases the risk that the government calls on it to buy bonds again, making it easier for authorities to issue bonds to finance economic stimulus, Yamamoto stressed. The BOJ wanted to avoid rapid reduction of its portfolio to lessen impact on the financial markets, which risked increasing long-term interest rates, he added, warning large-scale JGB buying distorted fiscal discipline.

“I understand a BOJ stance of cautiously moving toward the reduction of balance sheet as the BOJ doesn’t want to cause unexpected shock in financial markets,” Yamamoto said. He warned of the risk that the BOJ could be required to buy JGBs again if the bank advances the reduction of balance sheet without a programme.

The BOJ in March terminated the negative interest rate and yield curve control policy, judging it had achieved its 2% price target in a sustainable and stable manner. (See MNI INTERVIEW: BOJ Needs Signs Of Real Wages Growth -Yamamoto)

FINANCIAL STABILITY

While it would be difficult for the BOJ to reach an agreement with the government to separate government debt management from monetary policy, along the lines of the U.S. Treasury-Federal Reserve Accord of 1951, the central bank should establish the balance-sheet reduction programme in advance so that investors can price it in without causing instability, Yamamoto said, pointing to the Fed’s announcement to lower its holdings before it raised its policy rates in its latest tightening cycle.

Pointing to the recent poor record of the Federal Reserve and the European Central Bank in containing inflation, Yamamoto said that there was a risk prices could spike in Japan, forcing the BOJ to raise its policy interest rates rapidly. MNI reported last month the Bank will aim to lower its bond buying to JPY5 trillion a month by July. (See MNI POLICY: BOJ Aims To Cut JGB Bond Buying Level In July)