BOJ policymaker calls for review of ultra-easy policy framework -Asahi

TOKYO  -The Bank of Japan should conduct a review of monetary policy framework and tweak its massive stimulus programme depending on the outcome, its board member Naoki Tamura told the Asahi daily in a sign of growing focus on the drawbacks of prolonged easing.

While the timing of the review would depend on economic and price developments, it could come “soon or at a somewhat later date,” Tamura said in the interview published on Friday, adding that the outcome of next year’s spring wage negotiations would be key.

“Whether the BOJ needs to tweak its (ultra-easy) monetary policy will depend on the outcome of the review,” he said.

The remarks are the first from an incumbent BOJ policymaker calling for an examination of the pros and cons of yield curve control (YCC), a policy that combines a negative short-term interest rate target with a pledge to cap the 10-year bond yield around 0 percent.

They also come ahead of a BOJ leadership transition when dovish governor Haruhiko Kuroda’s second, five-year term ends in April next year.

While Kuroda has ruled out the chance of a near-term withdrawal of stimulus, markets are rife with speculation the BOJ may tweak YCC when his successor takes the helm.

A former commercial banker, Tamura said the BOJ’s stimulus helped improve the economy but was causing some distortions in market pricing, according to Asahi.

He also said there was scope to review the feasibility of the BOJ’s 2 percent inflation target and consider it as a more flexible goal, as the level may have been too high for Japan, the paper said.

“As long as the economy is achieving a virtuous cycle, I think it’s okay even if inflation is at, say 1.8 percent” instead of 2 percent, he was quoted as saying.

Japan’s core consumer inflation, which strips away volatile fresh food but includes fuel costs, exceeded the BOJ’s 2 percent target for seven straight months in October as the weak yen propped up the cost of already expensive fuel and food imports.

But wage and service prices have barely risen, keeping the BOJ cautious of following in the footsteps of other major central banks in withdrawing stimulus.

Critics of YCC, however, have warned of the rising cost of prolonged easing as the BOJ’s relentless bond buying to defend its yield cap has drained bond market liquidity. Years of low rates have also hurt financial institutions’ profits, forcing them to load up on risky investments in search for yield.

The BOJ tends to conduct a review when it needs to justify a tweak to its policy framework. It conducted one in 2016 when it shifted to YCC, which focuses on guiding interest rates, from a policy targeting the pace of money printing.

It did another review in March last year to make YCC more sustainable, such as by widening the band at which long-term rates could move around the 0 percent target.