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The BOJ decided to keep its short-term interest rate target at minus 0.1% and a pledge to guide 10-year government bond yields around zero percent. Photo: Bloomberg
The BOJ decided to keep its short-term interest rate target at minus 0.1% and a pledge to guide 10-year government bond yields around zero percent. Photo: Bloomberg

Bank of Japan keeps monetary spigot open, new board member dissents

The Bank of Japan keeps monetary settings steady, but a board newcomer argues against the BOJ's view that current policy is sufficient to boost inflation to its 2% target

Tokyo: The Bank of Japan (BOJ) kept monetary settings steady on Thursday, but a board newcomer argued against the central bank’s view that current policy was sufficient to boost inflation to its 2% target in a sobering assessment of the outlook.

Goushi Kataoka, a vocal advocate of aggressive easing who joined the board in late July, dissented in an 8-1 vote—potentially exposing a fresh rift in the board that could further delay any plan by the BOJ to dial back its massive stimulus.

As widely expected, the BOJ decided to keep its short-term interest rate target at minus 0.1% and a pledge to guide 10-year government bond yields around zero percent under its yield curve control (YCC) policy.

The BOJ also maintained a loose pledge to keep buying bonds so its holdings increase at an annual pace of 80 trillion yen ($717.6 billion), diverting from the US Federal Reserve’s plan to steadily pull back from crisis-era measures.

Kataoka expressed scepticism about BOJ’s conviction on hitting 2% inflation. “Given excess supply capacity remaining in the capital stock and labour market, monetary easing effects gained from the current yield curve aren’t enough to achieve 2% inflation around fiscal 2019," as projected by the BOJ, Kataoka said in a statement announcing the policy decision.

The former economist did not propose lowering rates but said inflation was unlikely to accelerate toward 2% from next year, signalling the need for further easing steps to nudge up consumer inflation from current levels of around 0.5%.

Kataoka and former banker Hitoshi Suzuki, who voted with the majority of the board, replaced former market analysts Takahide Kiuchi and Takehiro Sato, who had voiced doubts on Kuroda’s radical monetary experiment.

“Kataoka is on his own for now and hasn’t proposed additional easing. It is a question of whether other board members swing to his side," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities. “Kataoka has expressed doubt about the effects of YCC, which will spur some debate about how YCC is managed and could lead to some minor adjustments or talk about additional easing via another channel," he said.

BOJ to lag Fed

The announcement came hours after the Fed’s decision to leave interest rate unchanged and a signal it still expects one more increase by the end of the year, which pushed the dollar to a two-month high against the yen.

With inflation distant from his target, Governor Haruhiko Kuroda will likely reassure markets the BOJ will lag well behind its US counterpart in scaling back its massive stimulus at a post-meeting briefing at 12.00pm. Markets will also be on the lookout for clues from Kuroda on how Japan’s changing political landscape could affect monetary policy.

Government sources have told Reuters premier Shinzo Abe is considering calling a snap election for as early as next month and will pledge to use some of the revenue from a scheduled sales tax hike in 2019 to fund spending on education and child care.

That would force the government to delay the timing for achieving its fiscal consolidation target, a set-back for Kuroda who has consistently called on the need to get Japan’s tattered fiscal house in order. Some analysts say any delay in fiscal reform could put the central bank under pressure to keep borrowing costs ultra-low for longer than it wants.

“Instead of pushing up inflation, YCC is causing demerits such hurting bank profits and weakening Japan’s banking system," said Izuru Kato, chief economist at Totan Research. While the election results won’t have an immediate impact on monetary policy, the BOJ’s ultra-loose policy will be blamed for allowing the government to be lax on fiscal discipline, he said. Reuters

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