The Bank of Japan should refrain from expanding stimulus further as the risks of additional easing outweigh the benefits, especially as borrowing costs are already very low, former central bank policymaker Sayuri Shirai said on Monday.
The central bank’s next step should be to taper its massive asset-buying programme, accompanied by a deepening of negative interest rates to moderate rises in bond yields, she said.
Once a vocal advocate of Governor Haruhiko Kuroda’s radical monetary experiment, Shirai criticised the BOJ for maintaining overly optimistic inflation forecasts and insisting that it has plenty of tools left if it were to ease again.
“The BOJ has over-promised on what it can deliver, so it needs to be more realistic on what can be done,” the former International Monetary Fund economist said in an interview.
“It needs to come up with a more realistic forecast and be honest about what it can achieve. There are clearly limits to the BOJ’s policy means,” said Shirai, who left the bank in March and is now a professor at Japan’s Keio University.
A surging yen and weak inflation have heightened market expectations the BOJ will ease at its rate review on July 28-29.
The comments by Shirai, who retains close contact with policymakers across the globe, underscore the concern held by some central bankers over the rising costs and diminishing returns of unconventional monetary policy.
“Monetary policy has done more than enough,” she said, stressing that Japan no longer faces a shortage of demand and instead needs to focus on boosting its low potential growth – something out of the realms of monetary policy.
“The steps the BOJ had taken already are exerting sufficient, or even excessive, effects on the yield curve. I can’t see why the BOJ needs to ease more.”
FURTHER YEN RISES UNDESIRABLE
Shirai said sudden yen gains recently may hurt corporate profits temporarily but added that dollar/yen was still within the 100-110 zone deemed comfortable by many companies.
“If the yen appreciates sharply further, that could be problematic. But that’s not something that can be addressed with monetary policy,” she said, calling for other steps such as currency intervention. The dollar is now around 102.70 yen.
“Given it will take more time than expected (to hit 2 percent inflation), the BOJ should say it will initially target 1 percent inflation. Once 1 percent is achieved, the BOJ can discuss the next hurdle, which is 2 percent inflation.”
To end two decades of debilitating deflation, Kuroda began a huge money-printing programme in 2013, tied to a two-year target to push inflation to 2 percent. But three years of aggressive asset buying, and January’s decision to add negative rates to its loose-money policy, have failed to push up prices.
Shirai, who voted for the adoption and expansion of the asset-buying programme but dissented to negative rates, said the BOJ should not deepen negative rates or top up asset purchases for the purpose of monetary loosening.
With the demerits of its programme increasing, the BOJ should instead consider tapering its asset purchases from around the end of this year if inflation picks up, Shirai said.
“The BOJ should consider tapering its stimulus programme fairly soon. Tapering asset buying alone would be difficult, so it should accompany that with a deepening of negative rates” to moderate any spike in short-term bond yields, she said.