By Tetsushi Kajimoto and Yoshifumi Takemoto
TOKYO (Reuters) – The Bank of Japan (BOJ) should be cautious about changing its unconventional monetary policy for now, given financial market uncertainty due to problems in Western banks, former top financial diplomat Takehiko Nakao told Reuters in an interview.
Nakao made the comments amid speculation the BOJ may abandon its yield curve control policy when new Governor Kazuo Ueda takes over incumbent Haruhiko Kuroda, whose term ends on April 8.
U.S. bank failures and the buyout of Credit Suisse by UBS last month have driven financial market risk aversion.
Nakao said the BOJ must carefully monitor market developments, for now, although credit anxiety was unlikely to morph into anything like the 2008/09 global financial crisis.
Japan needs to start making adjustments towards normalising fiscal and monetary policies as financial markets stabilise, because prolonged stimulus inhibits necessary corporate restructuring and job turnover, he said.
“The BOJ may need to tread even more cautiously in reconsidering and adjusting monetary policy in the face of new problems of financial market jitters,” said Nakao, former vice finance minister for international affairs, who coordinated with other countries in responding to the euro crisis in the 2010s.
“Yet, the BOJ cannot continue unconventional monetary policy, including ETF and REIT purchases and YCC, indefinitely. Doing so won’t be in the interest of Japan in the long run.”
Nakao was referring to the central bank’s purchases of assets such as exchange-traded funds and real estate investment trust and its policy targeting the bond yield curve.
In Japan, the risk of a prolonged easing includes excessive yen weakening and deteriorating fiscal discipline, rather than falling behind the curve in fighting inflation, Nakao said in the interview conducted on Thursday.
“Fiscal deficits and the BOJ’s assets have become so large in comparison with GDP that it could have potential risks of steep rises in interest rates and sudden currency falls, which leads to inflation.”
Nakao was the president of the Asian Development Bank from 2013 through early 2020. He is now “Chairman of the Institute” at Mizuho Research and Technologies, part of Mizuho Financial Group Inc, Japan’s third-biggest commercial bank.
(Reporting by Tetsushi Kajimoto and Yoshifumi Takemoto; Editing by Sam Holmes)