Economy · August 7, 2022

Japan has a “once in a lifetime” chance to end deflation, says the outgoing BoJ official

Japan needs bolder monetary and fiscal stimulus to seize “a once-in-a-lifetime opportunity” from global inflationary pressures to end its war on deflation, according to a Bank of Japan board member who recently left the central bank.

In recent months, the BoJ has come under market pressure to reassess its extremely easy monetary policy as central banks around the world rush to raise interest rates to tame rising food and commodity prices. With Japanese interest rates still minus 0.1 percent, a divergence in global yields earlier this year brought the yen to a 24-year low against the US dollar.

But Goushi Kataoka, an aggressive reflationary who left the board of the BoJ last month and was appointed chief economist of PwC Consulting in Japan, warned that any attempt to undermine the central bank’s efforts to meet and sustain its inflation target. 2% would have serious consequences for Asia’s largest advanced economy.

After Japan’s economic bubble burst in 1990, the country got stuck in a vicious cycle of slow growth and stagnant or falling prices, which led to a persistent lack of demand.

The decline in the yen and the surge in oil prices have recently pushed Japanese headline inflation to 2.5%. Excluding commodity price volatility, however, underlying inflation is still weak and there has been no shift from rising prices to rising wages.

“Japan is at an important crossroads where price developments could drastically change if both the government and the Bank of Japan take bold steps” to expand fiscal and monetary stimulus, Kataoka said in his first interview since. left the board of directors of the BoJ. “This is a once-in-a-lifetime opportunity for the BoJ.”

Goushi Kataoka
Goushi Kataoka said any attempt to undermine the BoJ’s efforts to meet and sustain its 2% inflation target would have serious consequences for the Japanese economy © Issei Kato / Reuters

When hedge funds accumulated short positions on Japanese government bonds in June, the BoJ was forced to significantly increase bond purchases to impose a 10-year bond yield cap close to zero, a policy called curve control. of returns. The pressure has since eased as the yen has strengthened on recession fears in the US.

While some critics have called on the BoJ to widen the yield curve to address distortions in the financial sector, Kataoka said setting bond yields to zero at a time when global rates are rising is key to increasing the easing impact. .

But he recognized the limits to what the BoJ can do, saying the government must encourage companies to raise wages by offering bolder tax incentives. “There seems to be a profound lack of sense of crisis” within Prime Minister Fumio Kishida’s administration, she said.

He noted that further stimulus measures, such as tax cuts, are needed for businesses and households to offset the impact of the weaker yen and the rising cost of imported goods.

Since Kataoka joined the BoJ’s board of directors in 2017, he has consistently voted against central bank monetary policy decisions, arguing that a more aggressive approach with interest rate cuts was needed to avoid downward pressure on the central bank. prices. As the only dissident on the board, he also called for a more firmly stated commitment from the BoJ to reach his inflation target himself.

Kataoka was replaced by Hajime Takata, an economist who has spoken out about the negative side effects of the BoJ’s easing program and skeptical of the feasibility of its 2% inflation target.

The appointment has been closely followed as a prelude to the Kishida administration’s selection of a successor to BoJ Governor Haruhiko Kuroda when his term expires in April.

“It is feared that there will be moves to make the inflation target in name only. This would destroy the legacy of what the BoJ has achieved so far, “Kataoka said.

“The key question is whether the new governor can overcome criticism from the public and other countries to fulfill the crucial mission of maintaining and evolving Kuroda’s legacy to anchor inflation expectations at 2%,” he added.