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BOJ member warns against excessive monetary easing

Overly stimulating demand may destabilise economy, hurt financial institutions' profits and disrupt banking system


BANK of Japan board member Makoto Sakurai said on Thursday excessive monetary easing could destabilise the economy and suggested the central bank could whittle down its massive stimulus programme if growth continues to strengthen.

Mr Sakurai, a former academic who is seen as representing the BOJ's mainstream views, also said the central bank must be mindful of the risk that prolonged easing may hurt financial institutions' profits and disrupt Japan's banking system.

"If the current easy policy continues, the effect on banks will be cumulative. We could see more signs of the side-effects of our policy," Mr Sakurai told a news conference after meeting business leaders in Maebashi, eastern Japan. But he stressed that it was premature to exit ultra-loose policy now, as inflation remains distant from the BOJ's 2 per cent target and labour shortages have yet to boost wages.

"If inflation picks up, the effect of our stimulus policy will increase. That would be the timing where the BOJ would need to think about various steps," Mr Sakurai said.

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"It's not something we need to think about now," he said, when asked whether the BOJ should raise its yield target.

The remarks underscore a growing concern among central bankers about the rising cost of the BOJ's stimulus programme, which has made them more open to debating a future exit from crisis-mode policies.

Mr Sakurai said the BOJ's yield curve control (YCC), which caps long-term borrowing costs at zero, will have a stronger effect in boosting demand as inflation expectations grow. That means maintaining ultra-loose policy for too long could create excessive demand, he added.

"We need to pay utmost caution so that changes in the external environment don't disrupt the balance between supply and demand," Mr Sakurai said in a speech to the business leaders. "The BOJ must examine how best to guide monetary policy as needed without any preset idea, taking this point into account."

He told the news conference that all options were on the table when the BOJ were to dial back stimulus, including rate hikes and a slowdown in its asset purchases.

"If the negative effect of monetary easing becomes clear, we need to change policy," Mr Sakurai said. "I don't think we're in a stage where the demerits are so clear and warrant a policy shift."

Under YCC, the BOJ guides short-term rates at minus 0.1 per cent and the 10-year bond yield around zero per cent. REUTERS

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