BOJ to stand pat even as Japan set to slump into deflationL ex-central banker

TOKYO (Reuters) - Japan will slide into mild deflation for the next three years as the coronavirus crisis crushes demand and leads to more job losses, but the Bank of Japan is unlikely to ramp up stimulus to support prices, a former central bank policymaker said.

FILE PHOTO: A vendor, wearing a protective mask following an outbreak of the coronavirus disease (COVID-19), offers merchandise on an almost empty street in the Dotonbori entertainment district of Osaka, Japan, March 14, 2020. REUTERS/Edgard Garrido

Cutting interest rates further will hurt already weak regional lenders, which could face a build-up of bad loans as they boost lending to cash-strapped firms hit by COVID-19, Takahide Kiuchi said.

“Japan will likely see more small and midsized firms go under as the pandemic’s pain deepens, which could boost credit costs for lenders through next year,” said Kiuchi, currently executive economist at Nomura Research Institute.

“The pandemic has forced the BOJ to be more mindful of the risk of banking-sector problems, which means it can’t cut interest rates easily,” he told Reuters on Tuesday.

Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and long-term yields around zero.

While BOJ Governor Haruhiko Kuroda has stressed his readiness to cut rates if needed, many analysts see that option as highly unlikely given the strain years of ultra-low rates has inflicted on commercial banks’ profits.

Kiuchi said Japan will need about five years for gross domestic product (GDP) to return to pre-pandemic levels.

“Core consumer inflation will hover in slightly negative territory for about three years,” he said. “But the BOJ has already detached its policy from its 2% inflation target, which means it won’t take action to prop up prices.”

During his five-year tenure at the BOJ until 2017, Kiuchi was a consistent dissenter to Kuroda’s radical stimulus measures on the view that excessive money printing could do more harm than good.

Japan suffered its biggest economic slump on record in the second quarter as the pandemic hit consumption and exports. Core consumer prices stood flat in July from a year earlier.

Reporting by Leika Kihara and Takahiko Wada; Editing Shri Navaratnam