REPEAT: MNI INTERVIEW: Ex-BOJ Offl: Japan Recession Pre 2% CPI

--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.

     --CAPEX BAD NEWS

     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.

     --SHOULD IDENTIFY RISKS

     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.

     --MUST ESTIMATE COSTS

     "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: max.sato@marketnews.com