The Bank of Japan should review its yield curve control program under its incoming governor, a former top Finance Ministry official said ahead of the central bank¡¯s first leadership change in a decade.
The ongoing monetary easing has caused side effects, including distortions in the bond market, a drop in the currency and a weakening of fiscal discipline, according to Takehiko Nakao, a former vice minister for international affairs. He stressed the need for the policy tweak while also noting that such a move will come with risks.
¡°The yield curve control should be reviewed, even if that results in short-term shocks,¡± Nakao said in an interview Monday. He didn¡¯t specify the preferred timing or detailed process for the review. ¡°This can¡¯t go on forever.¡±
Academic Kazuo Ueda will be replacing Haruhiko Kuroda as governor of the BOJ this weekend, and faces the thorny problem of what to do with a complicated policy framework that has resulted in the buying of assets larger than the size of Japan¡¯s economy. Nakao¡¯s calls for a policy adjustment add to a majority of economists expecting change from the BOJ by June, according to a survey conducted around a month ago.
Nakao, who now chairs Mizuho Research & Technologies, suggested multiple uncertainties exist for incoming governor Ueda. One of them is a series of recent banking crises that have heightened financial insecurity worldwide.
¡°Now the BOJ needs to take into account the stability of the financial sector, as well as monetary policy in the U.S. and Europe, when it reconsiders its own policy,¡± Nakao said.
Still, the former senior Finance Ministry official said it¡¯s unlikely that Japanese financial institutions will find themselves in the same situation as Credit Suisse Group, due to the more limited number of Japanese banks, strict supervision practices and banks¡¯ relatively conservative business models.
Nakao also suggested Japan¡¯s recent price developments are another factor that could complicate Ueda¡¯s monetary policy steering.
It¡¯s unclear whether tightening is necessary to counter inflation, or if inflationary pressures aren¡¯t as strong as they appear, Nakao said. He said that Japan¡¯s current price gains are driven by higher import costs and not by wage hikes, echoing the central bank¡¯s latest view.
Nakao also criticized the expanding expectations for monetary policy, which is now viewed as a solution to a wide range of problems from growth, prices to climate change.
Monetary policy has been seen as ¡°a cure-all,¡± said Nakao. ¡°That thinking¡¯s created all sorts of problems.¡±
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