INTERVIEW: Ex-BOJ Exec Sees Monetary Policy Easing Ahead

January 2, 2019

Tokyo--The Bank of Japan is expected to consider how to ease monetary policy further as the global economy is seen decelerating, former BOJ Deputy Governor Hirohide Yamaguchi has said.

"In 2019, the global economy is expected to decelerate mildly after peaking out in 2018 against the backdrop of European and Chinese economic slowdowns," he said in a recent interview.

A similar development is expected also for the Japanese economy, which is suffering from sluggish exports, Yamaguchi said.

If the U.S.-China trade friction intensifies, the global economy will fare worse than currently expected, possibly disrupting international financial markets, said Yamaguchi, chairman of Nikko Research Center Inc.

An even bigger risk factor is what look like bubbles in stock and commercial and residential real estate markets in some countries, Yamaguchi said.

"The bubbles may burst between late 2019 and 2020," he warned.

Noting difficulties preventing asset bubbles, Yamaguchi stressed the importance of closer cooperation between central banks and financial regulatory authorities to prepare for a financial crisis that may come.

"Superloose monetary policies in major economies have caused rises in real estate prices," he said. "In order to reduce the room for expansion of bubbles, it would be ideal if the view is widely shared that monetary easing should not be maintained for a long time."

The BOJ's current monetary policy regime, including heavy purchases of Japanese government bonds and other assets, has led to the yen's weakness, corporate earnings growth and stock price rises, he said.

But the BOJ remains unable to hit its 2 pct inflation target more than five years after the regime started in 2013, Yamaguchi noted, adding that negative effects of the superloose policy have become evident recently, outweighing positive effects.

"The earnings-generating power of financial institutions has been damaged," he continued. "BOJ intervention into markets through massive JGB purchases and other measures has disturbed market functions of giving signals about the economic and financial situations."

"Frankly speaking, the yield curve control should not have been introduced," he said.

The BOJ took the step in 2016 to hold down interest rates across the yield curve. At present, the bank is guiding short-term rates below zero pct and 10-year JGB yields around zero pct.

Yamaguchi left office as deputy governor in 2013.

As the Japanese economy is expected to decelerate, the BOJ will need to consider what more action it can take to ease monetary policy, Yamaguchi observed.

"It has become clear that the 2 pct inflation target cannot be reached merely through monetary policy," he said.

"It's necessary to strengthen the Japanese economy's potential to grow, but it takes time," he went on.

He called for measures to drive unprofitable companies out of the market, expand the country's labor force and promote business investment and innovation, as well as public pension and medical system reforms.

It is important to carry out the planned consumption tax hike to 10 pct from the current 8 pct in October 2019 as scheduled, but the measure is far from enough to improve the fiscal situation, he added. Jiji Press