Dissenter criticizes BOJ's flexible bond yield plan, wants more easing

YOKOHAMA, Japan (Reuters) - Bank of Japan board member Goushi Kataoka criticized on Thursday the central bank’s decision in July to make its policy framework more sustainable, arguing that it should have instead ramped up stimulus to hasten the achievement of its elusive price target.

Bank of Japan (BOJ) new policy board members Goushi Kataoka attends a news conference at BOJ headquarters in Tokyo, Japan July 25, 2017. REUTERS/Issei Kato

Kataoka, a vocal advocate of aggressive easing, also said the bank’s new pledge to keep interest rates low for an extended period was too weak to fire up inflation.

“It’s unclear how much effect the guidance has beyond confirming the status quo,” Kataoka told a speech to business leaders in Yokohama, a city near Tokyo.

Kataoka, who opposed the BOJ’s decision in July to take steps to address the rising costs of prolonged easing, said it was counter-productive to allow long-term yields to rise at a time inflation remained low.

“There’s no need to allow long-term interest rates to move in a wider range at a time when the BOJ is cutting its inflation forecasts,” he said.

“Allowing long-term rates to rise at a time inflation and inflation expectations aren’t heightening much could delay the achievement of the BOJ’s price target,” Kataoka said, adding that the BOJ must instead take additional easing measures.

Kataoka’s comments underscore a rift within the nine-member board between those wary of the rising cost of prolonged easing, and those who see the need for bolder steps to boost inflation.

They also came as the BOJ’s bond buying operation on Thursday pointed to a modest reduction in purchases this month, reinforcing market expectations the bank is slowly scaling back its massive asset-buying program.

Under its yield curve control policy, the central bank guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent.

With years of ultra-low rates squeezing bank profits and drying up bond market liquidity, the BOJ decided in July to allow long-term rates to move more flexibly around its target.

It also pledged to keep interest rates very low for an extended period, though analysts say the guidance is too vague and does not offer much clue on the timing of a rate hike.

Kataoka and board member Yutaka Harada, another vocal advocate of aggressive easing, opposed the decisions.

A former market economist, Kataoka has consistently called for the BOJ to ramp up stimulus by pushing down interest rates on borrowing over 10 years and longer.

Kataoka said price growth was weakening as a trend, contradicting Governor Haruhiko Kuroda’s view that inflation was sustaining momentum on its path toward his target.

Kataoka also said next year’s domestic sales tax hike and escalating global trade frictions clouded the growth outlook.

“Global trade frictions are intensifying and there’s no room for complacency,” as they could hurt corporate sentiment and discourage firms from increasing capital expenditure, he said.

Additional reporting by Tomo Uetake in Tokyo; Editing by Chang-Ran Kim and Eric Meijer