TOKYO (Reuters) - A key economic adviser to Prime Minister Shinzo Abe criticised the Bank of Japan for its negative interest rate policy and called for bolder fiscal measures to underpin a fragile economy.
Koichi Hamada, professor emeritus of economics at Yale University, said the BOJ must ensure interest rates do not fall to a “reversal rate,” or a level that could do more harm than good by crippling financial institutions’ ability to lend.
“Negative interest rates hurt, particularly smaller financial institutions’ health, so the BOJ must try to avoid a situation where interest rates reach a level deemed as a reversal rate,” Hamada said.
“There are limits to how much the BOJ can fine-tune the yield curve. In such cases, it’s necessary for fiscal policy to coordinate with monetary policy in such a way as to push up real and nominal interest rates,” he told Reuters in an email interview that concluded late on Wednesday.
Hamada is among the architects of stimulus programme deployed by Abe nearly seven years ago. Dubbed “Abenomics”, the strategy is based on bold monetary easing, flexible fiscal policy and structural reform.
His remarks come as Abenomics reaches a turning point, with the boost to growth from the monetary and fiscal policy components tapering off.
BOJ Kuroda countered the view, held among some critics, that the central bank cannot deepen negative rates further because doing so would inflict too much damage on financial institutions.
“Our negative rate policy is part of a package of monetary easing steps. I don’t think he is urging us to ditch negative rates or begin normalising policy,” Kuroda told a news conference on Thursday, when asked about Hamada’s comments.
“This goes not just for negative rates but for any other easing steps ... but we need to be vigilant to the potential side-effects,” he said after the BOJ’s widely expected decision to keep monetary policy steady.
Having failed to achieve its elusive 2% inflation target despite launching a “bazooka” massive asset-buying programme, the BOJ has exhausted its tools to fight another recession.
Years of heavy money printing have failed to fire up inflation to the BOJ’s target, forcing the central bank to maintain its massive stimulus despite the hit to financial institutions’ profits from ultra-low rates.
Fiscal policy, too, is constrained by Japan’s huge public debt - the biggest among major industrialised nations.
Hamada, however, countered the view Japan has limited scope to expand fiscal spending, arguing that the government should make the most from ultra-low interest rates by boosting public spending.
“When interest rates are low, the government’s dependence on debt won’t rise even if it issues public bonds for spending,” Hamada said. “When the private sectors are in excess savings, deficit financing works rather well to improve the public welfare.”
Japan compiled a $122 billion fiscal package earlier this month to support its stalling economy, hit by the global trade war, typhoons and a sales tax hike, and as policymakers look to sustain activity beyond the 2020 Tokyo Olympics.
Under a policy dubbed yield curve control, the BOJ aims to guide short-term rates at minus 0.1% and the 10-year government bond yield around 0%.
Reporting by Kaori Kaneko; Editing by Sam Holmes & Simon Cameron-Moore