October 22, 2018 / 9:33 AM / a year ago

Ex-BOJ chief Shirakawa warns monetary policy no quick fix to Japan's woes

TOKYO (Reuters) - Monetary policy is not a solution to Japan’s economic malaise, the country’s former central bank head Masaaki Shirakawa said, calling instead for more focus on measures to address structural problems like falling productivity amid an ageing population.

Breaking years of silence since leaving the Bank of Japan in 2013, Shirakawa cast doubt on whether unconventional monetary easing could reflate the economy and warned that relying too heavily on an ultra-easy policy could delay painful but needed reforms.

“The biggest cost (of unconventional monetary easing) was to give people the belief it will fix Japan’s economy problems,” thereby shifting attention away from efforts to deal with structural woes like a rapidly aging population, Shirakawa told a news conference on Monday.

“As the past five years of experience shows, it’s clear monetary policy does not offer a solution to Japan’s economic problems,” he said. “Central banks are neither super stars ... nor maestros.”

The remarks by Shirakawa, a former career central banker, come in the wake of warnings by the International Monetary Fund that policymakers across the globe might need to fight the next economic downturn with fewer policy weapons, after the ultra-loose strategy employed in recent years.

During Shirakawa’s five-year term as governor, the BOJ ramped up government bond buying and began buying risky assets to battle shocks to growth ranging from the collapse of Lehman Brothers to a devastating quake and tsunami in March 2011.

But he received criticism for doing too little, too late to beat deflation, including from his successor and incumbent governor Haruhiko Kuroda, who deployed a massive stimulus program in 2013 with a pledge to hit 2 percent inflation in two years.

In a recently published book, Shirakawa repeated his doubts over the BOJ’s pursuit of a 2 percent inflation target in a country which has rarely seen price growth accelerate that much.

“Focusing too much on achieving 2 percent inflation could prevent the economy from achieving sustainable growth,” by sowing the seed of financial imbalances, he wrote in the book.

Kuroda, who had denounced Shirakawa’s argument that monetary policy alone cannot fire up inflation, now repeats that it will take longer than expected to achieve 2 percent inflation.

Having failed to accelerate inflation with huge stimulus, Kuroda also blames structural factors for delaying achievement of his price goal such as falling productivity from a rapidly aging population - something Shirakawa had spoke of years ago.

Some BOJ policymakers have publicly warned of the growing demerits of Kuroda’s stimulus program, such as the hit to financial institutions’ profits from years of near-zero interest rates.

“Monetary policy only buys time,” Shirakawa wrote in his book. “If society fails to take necessary steps during the time bought, the cost will fall upon the society.”

Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Simon Cameron-Moore

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