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--Ex-BOJ Hayakawa: BOJ Must Estimate Accumulated Costs of Easing
By Hiroshi Inoue
     TOKYO (MNI) - Japan's economy will fall into recession before the Bank of
Japan achieves its 2% inflation target eventually and the BOJ board must take
the accumulated costs of large-scale easing more seriously, a former BOJ chief
economist told MNI in an exclusive interview.
     "Japan's economy in the current fiscal year is 'all right' but it is likely
to go into recession between fiscal 2019 and 2021," Hideo Hayakawa, a former BOJ
chief economist and currently senior executive fellow at Fujitsu Research
Institute, said, echoing views of other economists.
     The BOJ's quarterly Tankan for June and other surveys have indicated
capital investment will grow at a high pace in the current fiscal year.
     "But strong capital investment plans toward the end of an economic
expansion cycle is bad news," Hayakawa said, referring to the risk of boosting
production capacity when demand is about to slip and ending up cutting capital
stock later, pushing down GDP.
     "In addition to the negative impact of the consumption tax hike (scheduled
in October 2019), Japan's economy will be adversely affected by a possible
recession in the U.S. in or after 2019," he said.
     The U.S. federal funds rate, currently in a 1.75% to 2.00% range, will get
close to the neutral interest rate of about 3% after another rate hike this year
and three rate hikes in 2019, Hayakawa said, adding that an inverted yield curve
is a sign of recession in the U.S.
     Hayakawa said if the Japanese economy fell into recession, corporate
bankruptcies would increase, pushing up the credit costs from around zero
percent currently.
     If the credit costs rose, it would increase the financial burden at lenders
and could generate risks of a pullback in financial intermediation, he warned.
     Hayakawa also said the BOJ sounds too complacent about accumulated
side-effects of easing.
     In its latest quarterly Outlook Report released after the July 30-31 policy
meeting, the BOJ discussed the side-effects of aggressive easing.
     "Prolonged downward pressure on financial institutions' profits under the
continued low interest rate environment could create risks of a gradual pullback
in financial intermediation and of destabilizing the financial system," the BOJ
said. "However, at this point, these risks are judged as not significant, mainly
because financial institutions have sufficient capital bases."
     Hayakawa said this assessment is just stating the obvious at a time when
the bankruptcy rate is still low.
     "The BOJ should pay attention to how the costs of easy policy are
accumulating. The BOJ must act preemptively," he said.
     In the twice-annual Financial System Report, the BOJ has been pointing to
future risks to be caused by prolonged easing but there are no indications that
the board is taking the warning seriously, he added.
     "BOJ officials should estimate how the credit costs have been growing and
how they would rise in the event of a Lehman-level shock and recession,"
Hayakawa said.
     He was one of the six executive directors at the BOJ supporting the
governor from March 2009 to March 2013 after serving as the chief economist for
the central bank for about six years to 2007.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: