Incoming BOJ head says he has ideas on exit from ultra-easy policy

Incoming BOJ head says he has ideas on exit from ultra-easy policy

27 Feb    Finance News, PMN Business, REU

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TOKYO — Incoming Bank of Japan (BOJ) Governor Kazuo Ueda said on Monday he had ideas on how the central bank could exit its massive stimulus, but a shift to tighter policy would only come when the country’s trend inflation heightens significantly.

The central bank will reduce its bond buying and likely head toward policy normalization when sustained achievement of its 2% inflation target comes into sight, Ueda said.

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With trend inflation short of the BOJ’s target, however, the central bank must maintain current ultra-easy policy for now, he added.

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“Big improvements must be made in Japan’s trend inflation for the BOJ to shift towards monetary tightening,” Ueda said.

“It’s not that I have no ideas on how to tweak the BOJ’s current policy. But the desirable tweak will vary depending on economic changes at the time,” Ueda said, adding it was premature to comment on how the central bank may shift policy.

Earlier this month, the government named the 71-year-old academic as its pick to become next central bank governor in a surprise choice that markets initially saw as heightening the chance of an end to the unpopular YCC policy.

With core consumer inflation exceeding the BOJ’s target, Ueda faces the challenge of phasing out yield curve control (YCC), which has drawn public criticism for distorting market functions and crushing banks’ margins.

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While Ueda did not specifically define what constituted trend inflation, he said it was “above zero but short of 2%” and serving as a key gauge of the BOJ’s monetary policy decision.

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For now, the BOJ’s ultra-loose policy was appropriate as the benefits of the policy, such as the boost to growth, exceeded the costs like deteriorating market functions, he said.

“If trend inflation does not perk up, the BOJ must shift to a more sustainable policy or monetary easing framework to look after the cost of its stimulus,” Ueda said.

Ueda said he saw no need for now to change the BOJ’s 2% inflation target, or language in a joint statement that the government signed in 2013 and commits the central bank to hitting the price goal at the earliest date possible.

The upper house hearing follows testimony at the lower house of parliament on Friday, where Ueda stressed the need to maintain ultra-loose policy for now.

Upon approval by parliament, Ueda succeeds incumbent Kuroda, whose second, five-year term ends on April 8.

The nominations need the approval of both chambers of the Diet, which are effectively done deals as the ruling coalition holds solid majorities in both. (Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Jacqueline Wong and Sam Holmes)

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