Japan has a ‘once in a lifetime’ chance to end deflation, says outgoing BoJ official

According to a Bank of Japan board member who recently left the central bank, Japan needs bolder monetary and fiscal stimulus to seize “a once-in-a-lifetime opportunity” from global inflationary pressures to end its slump. war on deflation.

The BoJ has come under market pressure in recent months to reassess its ultra-accommodative monetary policy as central banks globally rush to raise interest rates to rein in rising food and commodity prices. raw materials. With Japanese interest rates still minus 0.1%, a divergence in global yields earlier this year sent the yen to a 24-year low against the US dollar.

But Goushi Kataoka, an aggressive reflationist who quit the BoJ board last month and was named chief economist at PwC Consulting in Japan, warned that any attempt to weaken the central bank’s efforts to achieve and maintaining its inflation target of 2% would have serious consequences for Asia. greater advanced economy.

After the bursting of Japan’s economic bubble in 1990, the country found itself locked in a vicious cycle of slow growth and stagnant or falling prices, resulting in a persistent lack of demand.

The falling yen and soaring oil prices have recently pushed Japan’s headline inflation to 2.5%. Excluding commodity price volatility, however, core inflation remains low and there has been no pass-through from higher prices to wage growth.

“Japan is at an important crossroads where the price trend could change drastically if the government and the Bank of Japan take bold steps” to extend fiscal and monetary stimulus, Kataoka said in his first interview since leaving the board. administration of the BoJ. “This is a unique opportunity for the BoJ.”

Goushi Kataoka said any attempt to weaken the BoJ’s efforts to reach and maintain its 2% inflation target would have serious consequences for the Japanese economy © Issei Kato/Reuters

When hedge funds built up short positions in Japanese government bonds in June, the BoJ was forced to dramatically increase bond purchases to cap 10-year bond yields at near zero, a policy called yield curve control. The pressure has since subsided as the yen strengthened amid US recession fears.

While some critics have called on the BoJ to widen the yield curve to address distortions in the financial sector, Kataoka said setting the bond yield at zero at a time when global rates are rising is crucial to increasing the impact of the crisis. relaxation.

But he acknowledged the limits of what the BoJ can do, saying the government must encourage companies to raise wages by offering bolder tax incentives. “There seems to be a profound lack of sense of crisis” within Prime Minister Fumio Kishida’s administration, he said.

He noted that additional stimulus measures, such as tax cuts, were needed for businesses and households to offset the impact of the weak yen and the rising cost of imported goods.

Since Kataoka joined the BoJ board in 2017, he has consistently voted against central bank monetary policy decisions, arguing that a more aggressive approach with interest rate cuts was needed to avoid downward pressure on prices. As the only dissenter on the board, he also called for a firmer commitment from the BoJ to hit its inflation target.

Kataoka was replaced by Hajime Takata, an economist who has spoken of the negative side effects of the BoJ’s easing program and skeptical of the feasibility of its 2% inflation target.

The appointment has been closely watched as a prelude to the Kishida administration selecting a successor to BoJ Governor Haruhiko Kuroda when his term expires in April.

“It is to be feared that there will be moves for the inflation target to be in name only. This would destroy the legacy of what the BoJ has achieved so far,” Kataoka said.

“The key question is whether the new governor can overcome criticism from the public and beyond to carry out the crucial mission of maintaining and evolving Kuroda’s legacy to anchor inflation expectations at 2%” , he added.

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