February 9, 2023

Japan needs stronger monetary and fiscal stimulus to seize “a unique opportunity” from global inflationary pressures to end its war on deflation, said a Bank of Japan board member that recently left the central bank.

The BoJ has come under market pressure in recent months to overhaul its ultra-easy monetary policy as central banks worldwide try to raise interest rates to curb rising food and commodity prices. With Japanese interest rates still at minus 0.1 percent, a divergence in global yields earlier this year sent the yen to its 24-year low against the US dollar.

But Goushi Kataoka, an aggressive reflator who left the BoJ board last month and was named chief economist of PwC Consulting in Japan, warned that any attempt to push the central bank’s efforts to meet and maintain the 2 percent inflation target would serious consequences for the Asian economy. largest advanced economy.

After Japan’s economic bubble burst in 1990, the country became trapped in a vicious circle of slow growth and stagnant or falling prices, leading to a persistent lack of demand.

The falling yen and rising oil prices have recently pushed up Japanese inflation to 2.5 percent. Excluding volatile commodity prices, however, underlying inflation is still weak and there has been no pass-through from rising prices to higher wages.

“Japan is at an important crossroads where price developments could change dramatically if both the government and the Bank of Japan take bold steps” to expand fiscal and monetary stimulus, Kataoka said in his first interview since taking over from the board. left the BoJ. “This is a once-in-a-lifetime opportunity for the BoJ.”

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

When hedge funds built short positions on Japanese government bonds in June, the BoJ was forced to significantly increase bond purchases to enforce a cap on 10-year bond yields near zero, a policy called yield curve control. Pressures have since eased with the strengthening of the yen on concerns about the US recession.

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While some critics have called on the BoJ to widen the yield curve to address disruptions in the financial sector, Kataoka said zeroing bond yields at a time when global interest rates are rising is critical to to increase easing.

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

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

Since joining the BoJ’s policy council in 2017, Kataoka has consistently voted against the central bank’s monetary policy decisions, arguing that a more aggressive approach with interest rate cuts was necessary to avoid downward pressure on prices. As the sole dissenter on the board, he has also called for a stronger commitment from the BoJ to meet its inflation target.

Kataoka was replaced by Hajime Takata, an economist who spoke out about the negative side effects of the BoJ’s easing program and was skeptical about the feasibility of the 2 percent inflation target.

The appointment was closely monitored as a prelude to the selection of a successor by the BoJ government, Haruhiko Kuroda, when his term ends in April.

“There is concern that steps will be taken to meet the inflation target in name only. That would destroy the legacy of what the BoJ has achieved so far,” Kataoka said.

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“The key issue is whether the new governor can overcome criticism from the public and elsewhere to carry out the critical mission of preserving and developing Kuroda’s legacy of anchoring inflation expectations at 2 percent,” he added.