More stimulus is likely from BOJ, says ex-deputy governor Iwata

[TOKYO] The Bank of Japan probably will need to add stimulus as there is nothing driving inflation amid emerging signs that the economy has slipped back into recession, according to a former deputy governor.

"Listening to Kuroda makes you think there is no need for further easing but the real economy is worse than expected," Kazumasa Iwata, a deputy governor from 2003-2008, said in an interview Wednesday. "It's moving in a direction where the BOJ has to do something." Data this week indicated the economy may have fallen into recession last quarter and prompted JPMorgan Chase & Co and Credit Agricole SA to bring forward their forecast for more monetary stimulus. That is at odds with Governor Haruhiko Kuroda, who said Monday that it's hard to see the economy contracting in the period and that the inflation trend is showing improvement.

"The economic assessments by the government and central bank seem too optimistic," said Mr Iwata, president of the Japan Center of Economic Research. "There are still risks of Japan returning to deflation." The break-even rate, which looks at the difference in yields between regular bonds and inflation-linked debt, is one measure to gauge the need for further easing, according to Iwata. It currently shows that the bond market expects prices to rising an average of 0.826 percent annually over the next 10 years. If that measure declines below 0.5 percent, the BOJ must act, Mr Iwata said.

Buying more government bonds with longer maturities as well as exchange-traded funds and investing in real estate trusts are options the BOJ has for further stimulus, Mr Iwata said. Given limits on available bonds and the need to keep buying them, the BOJ also may have to cut the 0.1 per cent interest rate on excess reserves, he said.

"It's a passive choice but they may have to move the rate on excess reserves," Mr Iwata said. "It's only 0.1 per cent so going to a negative rate is a possibility." BOJ board member Yutaka Harada in an interview in June flagged cuts in this rate as a possible future stimulus tool.

Japan's production unexpectedly dropped in August, spurring economists at Daiwa Research Institute, SMBC Nikko Securities Inc and elsewhere to say the economy probably contracted in the third quarter. JPMorgan said Wednesday Japan is probably in a recession and that the central bank will add to stimulus at its Oct 30 policy meeting.

"There is no sustainability for price increases," Mr Iwata said.

Gains in inflation excluding energy are probably going to end because of tepid wage growth and weak consumer spending.

Even before yesterday's data prompted changes in forecasts for more stimulus, 22 of 35 economists were predicting that Mr Kuroda would have to bolster already unprecedented stimulus. Eleven economists forecast this will occur Oct 30 when the bank reviews its inflation outlook, according to a Bloomberg survey conducted Sept 7-10.

BLOOMBERG