SAGA, Japan (Reuters) - Bank of Japan board member Makoto Sakurai ruled out the chance of an imminent hike in the central bank’s bond yield target, stressing the need to maintain its massive stimulus programme to prop up inflation and fend off overseas economic risks.
Sakurai said rising protectionist sentiment in the world was among risks to Japan’s economic outlook, warning that protectionism would disrupt supply chains, dent trade and hurt prospects of a sustained global recovery.
With Japan’s economy recovering steadily, policymakers should not seek to “forcefully” stimulate short-term demand, Sakurai said, shrugging off the need to deliver additional monetary stimulus measures any time soon.
“The economy is in good shape and the government’s fiscal spending plans are being implemented now,” Sakurai told a news conference after meeting business leaders in Saga, southern Japan, on Thursday.
“Maintaining the current fiscal and monetary stimulus measures would be enough.”
The BOJ, however, must also hold off on withdrawing stimulus any time soon with inflation well below its 2 percent target, said Sakurai, among the strongest proponents of aggressive monetary easing in the central bank’s nine-member board.
“There were some views in the market that the BOJ would consider raising its long-term interest rate target in the near future,” Sakurai said in a speech to business leaders in Saga.
“But underlying price growth remains moderate and uncertainties on overseas economies persist. It is therefore crucial to patiently maintain our monetary easing.”
Under a new policy framework adopted last year, the BOJ has pledged to guide short-term interest rates to minus 0.1 percent and cap the 10-year government bond yield around zero percent.
Growing signs of life in Japan’s economy have presented the BOJ with a fresh communications challenge, pushing it to be clearer with markets on how it might dial back its stimulus - even though such action remains a long way off.
Sakurai said it was premature to debate specifics on how to withdraw stimulus, but the BOJ must communicate its policy intentions clearly to prevent any disruption to financial markets when it comes time for it to withdraw stimulus.
“In Japan’s case, the impact (of an exit) could be big because of the central bank’s huge balance sheet,” he said.
Aside from its interest rate targets, the BOJ has a loose pledge to buy government bonds so the balance of its holdings increase around 80 trillion yen per year (551.7 billion pounds).
Some analysts believe the BOJ will soon tweak or remove the pledge, as the bank’s bond buying has slowed recently.
Sakurai said the BOJ’s bond buying pace could fluctuate from time to time depending on how much it needs to purchase to cap the 10-year government bond yield.
“If the amount of purchases fluctuates quite sharply in the future, we may need to think about what’s best to do. But for now, I think we can keep the 80-trillion-yen bond buying pledge,” he said.
Japan’s economy grew in the first quarter at its fastest in a year to mark the longest period of expansion in a decade, thanks to robust exports and a helpful boost from private consumption.
Many analysts now expect the BOJ’s next move to be a withdrawal, rather than an expansion, of its monetary stimulus.
But weak consumption has kept inflation around zero for almost two years, forcing the BOJ to revamp its policy framework to one better suited for a long-term battle against deflation.
Editing by Chang-Ran Kim and Jacqueline Wong