TOKYO (Reuters) – Bank of Japan Deputy Governor Masazumi Wakatabe said the central bank had plenty of tools to expand if it saw the need to ramp up stimulus for the economy or counter the negative impact a strong yen could have on inflation.
While the BOJ did not directly target exchange rates in guiding policy, the central bank was carefully watching yen moves due to their impact on Japanese price moves, he said.
“If we judge that inflation dynamics would be further eroded or weakened by exchange rate moves, that is the time we should think of taking policy action,” Wakatabe said.
“We’ve already set up a whole bunch of tools” that can be expanded, Wakatabe told a seminar on Friday. “We have to be innovative whenever we think about engaging in monetary policy.”
Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at -0.1% and the 10-year government bond yield around 0%. It also buys massive amounts of assets and pumps money to firms hit by COVID-19 via financial institutions using a new lending facility.
Wakatabe said the BOJ would not rule out the possibility of deepening negative rates, shrugging off the view that doing so was no longer an option due to the strain that prolonged ultra-low rates was inflicting on bank profits.
But he said any such move should be judged against the background of how it affects the entire shape of the yield curve.
“If we need to do more easing, that’s on the table,” he said, when asked whether the BOJ could take other steps to influence the shape of the yield curve such as changing the maturity of bonds it targets under YCC.
While concerns over the side-effects of prolonged easing were “understandable,” the benefits of the BOJ’s stimulus still outweighed the costs, he added.
‘DIVISION OF LABOR’
Central banks across the globe have joined governments in rolling out massive stimulus measures to cushion the economic blow from the pandemic.
Wakatabe, a vocal advocate of aggressive monetary easing, said Japan’s experience has shown that ultra-loose policy can be sustained for a prolonged period.
But he said while central banks can pump liquidity, it cannot spend money as that was the realm of governments and the private sector.
“One may find the joint statement between the BOJ and the government in 2013 rather interesting and useful in ensuring a proper division of labor,” Wakatabe said.
“It may be necessary for central banks and governments to agree on Japan’s 2013 joint statement-like arrangement” to tackle the current crisis with a proper division of labor, he said.
Under a joint statement in 2013, the BOJ agreed to hold itself responsible for achieving its 2% inflation target, while the government promised to pursue fiscal and structural reforms.
The 2013 statement laid the groundwork for BOJ Governor Haruhiko Kuroda to deploy his “bazooka” monetary stimulus that was among the three arrows of former premier Shinzo Abe’s “Abenomics” policies to revitalise the economy.
(Reporting by Leika Kihara; Editing by Chizu Nomiyama)