BOJ’s Sato blasts negative rates, urges modified policy framework

KUSHIRO (Japan), June 2 — Bank of Japan board member Takehiro Sato criticised the central bank’s negative interest rate policy as counter-productive and urged the BOJ to adopt a policy framework more suited for a long-term battle to beat deflation.

Sato, a former bond market strategist who voted against the BOJ’s January decision to adopt negative rates, said today the concept of charging banks for holding excess reserves had pushed down bank stocks and had hurt household confidence.

“Opinions are divided on the economic effects of the negative interest rate policy, and this is fuelling worries among the public,” Sato said in a speech to business leaders in Kushiro, northern Japan, adding that he was sceptical of the idea that negative rates would boost capital expenditure.

Japan’s historic move in early February to adopt negative rates failed to boost stock prices or arrest an unwelcome rise in the yen, drawing criticism from lawmakers for confusing, rather than calming, markets.

In the first and boldest criticism made publicly by a BOJ policymaker, Sato said negative rates could hurt Japan’s banking system by hitting financial institutions’ already narrowing margins and could even cause them to reduce lending.

“I believe the negative rate policy has the effect of monetary tightening, rather than easing,” he said. “When financial institutions face a negative spread, it’s reasonable for them to shrink their balance sheet rather than expand it.”

Sato’s remarks underscore the resistance BOJ Governor Haruhiko Kuroda may face if here were to propose deepening negative rates in the future.

Sato reiterated his view that the BOJ should consider its 2 per cent inflation target as a long-term goal with room for flexibility, rather than one with a rigid deadline.

That meant the BOJ should modify its current massive asset buying programme, which was intended to be a short-term move aimed at shocking the public out of its deflationary mindset.

“The challenge now is to reform the current framework, which is intended to provide solutions in the short term, to one that is better suited for a war of attrition,” he said.

For a start, the BOJ should take a more flexible approach in meeting its base money target and should not persist in achieving its inflation target “at all cost,” Sato said.

“I believe it is desirable to aim to achieve the 2 per cent inflation target as a medium- to long-term goal. I expect the road toward achieving this target to be long,” he said.  — Reuters 

from Malay Mail Online | All http://ift.tt/1r3jgOs

via Mukah Pages