April 10, 2015 / 7:58 AM / 4 years ago

Exclusive - BOJ's Nakaso warns market against betting on more easing

TOKYO (Reuters) - Bank of Japan Deputy Governor Hiroshi Nakaso has tempered market expectations that the bank will expand its stimulus programme later this month, saying a cut in its inflation forecast would not be enough to justify more monetary easing.

Bank of Japan Deputy Governor Hiroshi Nakaso speaks during an interview with Reuters at the BOJ headquarters in Tokyo April 9, 2015. REUTERS/Yuya Shino

Nakaso, one of Governor Haruhiko Kuroda’s two deputies, said that while slumping oil costs have pushed inflation back to zero, rising wages and a steady economic recovery will underpin a long-term rise in prices.

“What’s important is the underlying trend of inflation dynamics, which are steadily improving,” Nakaso told Reuters in an interview on Thursday, his first with non-Japanese media in nearly a year.

“As long as there’s no change to the underlying trend of inflation, additional monetary easing is unnecessary.”

Expectations that the BOJ might add to its stimulus programme at a rate meeting on April 30 have helped send Japanese shares to a 15-year-high.

But Nakaso’s remarks are the strongest denial to date by a senior BOJ official about the need for immediate policy action. They also show that Nakaso, who rarely speaks in public, shares Kuroda’s conviction that Japan is on track to hit the bank’s 2 percent inflation target in about a year from now.

The BOJ is under pressure to cut its forecast that inflation will hit 2 percent within the current fiscal year at a twice-yearly review of its projections on April 30, due to the impact of falling oil prices.

But while acknowledging that inflation was moving away from the BOJ’s target, Nakaso said there were clear improvements in inflation expectations such as the rising number of firms promising wage hikes, including for temporary workers.

“We’re seeing some positive changes in corporate and household behaviour that rarely happened when Japan was mired in deflation,” Nakaso said.

“That’s evidence that Japan is shaking off its deflationary mindset.”

The BOJ now expects core consumer inflation to hit 1.0 percent in the year to March 2016, roughly triple the pace estimated by private analysts.


Nakaso became deputy governor when Kuroda took the helm in 2013 and deployed his “quantitative and qualitative easing” (QQE) programme - a radical monetary experiment aimed at getting inflation to 2 percent in roughly two years.

Nakaso said he saw no need to alter the BOJ’s pledge to hit 2 percent inflation “at the earliest possible time with a time horizon of about two years” as having that target will help in its efforts to stimulate the economy.

“We have no intention of changing this commitment,” he said.

The BOJ argues the two-year time frame is not a rigid deadline but a broader commitment with room for manoeuvre.

Nakaso, an expert on market operations, said he was mindful of the need to ensure the BOJ’s massive purchases do not dry up liquidity in the bond market.

But there is so far no sign of severe market distortions or excessive risk-taking spurred by QQE, he said, brushing aside concerns held by some board members that the cost of the stimulus was outweighing the benefits.

“I don’t think we’ll face a situation where our purchases will be interrupted,” he said, suggesting that the BOJ still had room to top up bond purchases if it were to expand QQE again.

The BOJ now holds nearly a quarter of Japan’s government bond market as it buys up almost all the bonds sold by the government each month, raising concerns it was crowding out private investors.

Its aggressive purchases also mean its balance sheet is now equal to the size of Australia’s economy, making an exit from QQE increasingly challenging.

Nakaso, who played a key role in ending the BOJ’s previous quantitative easing in 2006, was quiet on how the bank might end QQE, saying only that it had tools available to withdraw stimulus when needed.

While his conviction of achieving the BOJ’s price target appeared unwavering, Nakaso warned events overseas - notably the unfolding crisis in Greece - could disrupt the positive momentum building in Japan’s economy.

“Deposits continue to be withdrawn from Greek banks and the government’s financing looks pretty tight,” he said.

“If Greece exits from the euro, even if accidentally, this could cause market turmoil and repercussions for Japan’s economy,” said Nakaso.

A man walks past the Bank of Japan building on a rainy day in Tokyo, February 18, 2015. REUTERS/Thomas Peter

Such worries and other duties keep him at the BOJ’s headquarters almost round the clock.

The soft-spoken 61-year-old confirmed his well-known reputation as a workaholic, admitting that he couldn’t think of anything he does besides work on a weekend.

“I don’t have a particular hobby. I’ll think of something once Japan exits deflation.”

Additional reporting by Stanley White and Yoshifumi Takemoto; Editing by Rachel Armstrong

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