TOKYO (Reuters) - Bank of Japan Deputy Governor Hiroshi Nakaso said the central bank has the necessary tools and expertise to engineer a smooth exit from ultra-easy policy, making the latest in a series of signals that the BOJ’s crisis-mode stimulus won’t last forever.
Nakaso, a career central banker with experience ending the BOJ’s previous quantitative easing program in 2006, said the BOJ has various ways to mop up liquidity from markets and whittle down its huge balance sheet.
“What tools we will use and in what sequence would depend on economic, price and financial conditions at the time,” he said in a seminar in Tokyo.
The timing of an exit from ultra-easy policy would depend on market sentiment, as communication with market players is crucial for withdrawing monetary stimulus smoothly, he said.
“An exit from quantitative and qualitative easing (QQE) is very challenging. But I’m confident the BOJ can do this with its various tools, experience, expertise and appropriate communication with markets,” Nakaso said.
He also said the BOJ could learn from the U.S. Federal Reserve’s efforts to dial back stimulus.
The BOJ has been dropping subtle hints it could edge away from crisis-mode stimulus earlier than expected, given the damage prolonged easing inflicts on bank profits.
While regional banks have sufficient capital buffers, they face common challenges which, if left unaddressed, could threaten to destabilise Japan’s banking system, Nakaso said.
Share market indicators suggested there was a possibility that business conditions will become unstable “simultaneously” at many regional financial institutions faced with dwindling population and sluggish fund demand, Nakaso said.
“There is no guarantee the financial system can continue to maintain stability in the future,” he said.
Consolidation and reorganisation of regional banks could be one solution, though more important were efforts by each of them to boost long-term profits, Nakaso said.
Any attempts to dial back stimulus will likely face resistance from the government. Prime Minister Shinzo Abe told parliament on Tuesday he saw no need to change the BOJ’s elusive 2 percent inflation target, and voiced hope it continues to pursue “bold monetary easing.”
Reporting by Leika Kihara; Editing by Minami Funakoshi & Simon Cameron-Moore