TOKYO, April 7 (Reuters) – The Bank of Japan (BOJ) should be cautious about changing its unconventional monetary policy for now amid uncertainty in financial markets amid problems at Western banks, former top financial diplomat Takehiko Nakao said in an interview with Reuters.
Nakao made the comments amid speculation that the BOJ could abandon its yield curve control policy if new governor Kazuo Ueda takes over incumbent Haruhiko Kuroda, whose term ends on April 8.
US bank failures and UBS’s takeover of Credit Suisse last month fueled risk aversion in financial markets.
Nakao said the BOJ needs to carefully monitor market developments for now, though the credit scare is unlikely to morph into anything like the 2008-09 global financial crisis.
Japan must start making adjustments to normalize fiscal and monetary policies when financial markets stabilize as continued stimulus restrains necessary corporate restructuring and job turnover, he said.
“The BOJ may need to be even more cautious when it comes to rethinking and adjusting monetary policy amid new issues of financial market jitters,” said Nakao, a former deputy finance minister for international affairs who has coordinated with other countries in responding to the euro crisis in the 2010s.
“Nonetheless, the BOJ cannot indefinitely continue its unconventional monetary policies, including ETF and REIT purchases and YCC. This will not be in Japan’s interest in the long run.”
Nakao was referring to the central bank’s purchases of assets such as exchange-traded funds and real estate investment trusts and its policies targeting the bond yield curve.
In Japan, the risk of prolonged easing entails excessive weakening of the yen and deteriorating fiscal discipline, rather than falling behind the curve in fighting inflation, Nakao said in Thursday’s interview.
“The BOJ’s budget deficits and wealth have become so large relative to GDP that it could face potential risks of a sharp rise in interest rates and sudden currency losses, leading to inflation.”
Nakao served as President of the Asian Development Bank from 2013 to early 2020. Today he is Chairman of the Institute at Mizuho Research and Technologies, part of Mizuho Financial Group Inc (8411.T), Japan’s third largest commercial bank.
Reporting by Tetsushi Kajimoto and Yoshifumi Takemoto; Editing by Sam Holmes
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