BoJ policy change will benefit the next governor

The Bank of Japan (BoJ) has modified its stimulus measures to ease the transition to unconventional monetary policy when Governor Haruhiko Kuroda retires in April, according to Takehiko Nakao, former Vice Finance Minister for International Affairs. , told Reuters in an interview.

The prolonged monetary easing has amplified side effects such as ineffective market functions, excessive weakening of the yen and loosening of fiscal discipline, at the expense of rising real revenues, the former official said.

The central bank surprised markets last week by easing its yield tolerance on 10-year Japanese government bonds (JGBs), a move aimed at easing the price of prolonged economic stimulus.

“The BoJ has failed to raise inflation expectations as much and lower real interest rates as much, while the spillover effects have grown larger. I think the current framework has to be changed sooner or later,” he stated.

“I am not sure about the reason for the last action, but it may have the effect of easing the burden on whoever succeeds Kuroda in relation to all the negative impacts derived from the adjustments (…) It was good in the sense that it reduced the burdens to initiate the adjustment of the policy”.

Altering the BoJ’s easy money policy would cause shocks such as rising mortgage interest rates and JGB yields, but it needs to be done, Nakao said, also noting that the BoJ’s 2% inflation target, stipulated in a government deal, it could make monetary and fiscal policy inflexible.

Nakao was also president of the Asian Development Bank from 2013 to early 2020 and is now president at Mizuho Research and Technologies, part of Mizuho Financial Group, Japan’s third-largest commercial bank.

recession risk

Nakao was cautiously optimistic about the global economic outlook for the coming year.

Speculation of a global recession persists due to global monetary policy tightening, but Nakao saw no need to be pessimistic, with the United States supported by strong domestic demand and a flexible labor market that may lead to sustainable wage increases.

“There is no need to think that a recession is inevitable,” Nakao said.

Although the strength of the dollar may tighten emerging market debt, Nakao ruled out the risk of a return from the Asian financial crisis due to the stability of monetary policies, stricter fiscal discipline and financial regulation in the region.