Key BOJ policymaker signals fine-tuning, not overhaul, of stimulus

[TOKYO] The Bank of Japan can maintain its base money target and utilise existing tools to expand stimulus, rather than use this month's policy review for a major overhaul of its monetary framework, a board member who could cast a decisive vote said.

Makoto Sakurai, a former think-tank executive considered an advocate of ultra-loose policy, told Reuters that more radical options such as foreign bond purchases or "helicopter money", in which the central bank directly underwrites government debt, were off the table for now.

Instead, the BOJ will likely focus on refining current policy steps and consider ways to fix a bond yield curve that has flattened too much as a result of its negative interest rate policy, he said.

"I don't think we're now seeing any limit to or facing any problems with having a base money target. There is no need to remove the target," Mr Sakurai said in his first media interview since joining the board in April.

"There's plenty of room to take action not just in terms of buying more exchange-traded funds but in terms of deepening negative rates and buying more assets. I don't think we are reaching any limit."

Mr Sakurai's views are important due to his pivotal position on the board, which at a crucial rate-review on Sept 20-21 will comprehensively assess its policy framework in a bid to speed achievement of its 2 percent inflation target.

He sits somewhere in the middle of a nine-member board split between those favouring Governor Haruhiko Kuroda's radicalism and those wary of topping up stimulus.

Mr Sakurai's comments suggest the BOJ is leaning toward maintaining the status quo rather than make big changes proposed by some academics, such as having a cap on long-term interest rates.

The September's review won't lead to a retreat from the BOJ's aggressive easing stance or a change in its inflation target, Mr Sakurai stressed. But he suggested it may abandon a two-year timeframe for hitting the goal, as inflation has slid despite three years of aggressive money printing.

"We're undoubtedly seeing some delays due to external factors," he said. "But we're still aiming to hit the price target at the earliest date possible."

In January, the BOJ decided to add negative interest rates to its massive stimulus programme, under which it pledges to increase base money by 80 trillion yen (S$1.1 trillion) a year via purchases of government bonds and risky assets.

But the move failed to arrest an unwelcome yen rise and drew criticism from commercial banks for crushing long-term rates and flattening the yield curve, squeezing already-thin margins.

Mr Sakurai is the first BOJ policymaker to publicly admit negative rates have flattened the yield curve more than hoped for, a sign the central bank is becoming more mindful of the cost of its policies.

"One thing we could consider as a policy option is ways to change the shape of the yield curve," Mr Sakurai said.

He did not elaborate on how this could be done. But the remark suggests the BOJ could warm to some ideas floated by markets, such as changing its base money target to a range or be more flexible about what type of bond it buys.

The BOJ assessment will decide which tools - topping up asset purchases, buying more risky assets and deepening negative rates - work best in what circumstances and in what combination, Mr Sakurai said.

The board's analysis on negative rates will be crucial to its decision on whether to ease again as early as this month, he added.

"The BOJ shouldn't ease recklessly. We need to make policy decisions after looking carefully at the effects of past policy decisions," he said.

Little has been known on Mr Sakurai's views. He has been perceived as favouring aggressive easing due to ties with reflationalist-minded academics.

However, he was cautious about the BOJ taking radical steps, and called helicopter money "impossible" under Japanese law.

Buying foreign bonds, proposed by an adviser of premier Shinzo Abe, was tantamount to currency intervention and breaching the finance ministry's jurisdiction on exchange-rate policy, Mr Sakurai said.

"It's not something that's in our tool-kit."

REUTERS