By Leika Kihara
KANAZAWA, Japan (Reuters) – Dissenting Bank of Japan board member Takahide Kiuchi said the central bank should review its negative interest rate policy and inflation target timeframe, while warning there wasn’t much it could do to help the economy in the event of a severe market shock.
With markets nervous as polls opened in Britain’s referendum on membership of the European Union, Kiuchi said the BOJ was ready to offer emergency liquidity via market operations if turmoil follows a vote to leave.
But he said the central bank, which is already nearly three years into a huge asset-buying stimulus programme and in January adopted negative interest rates, had little left in its tool-kit to boost growth if market mayhem threatened Japan’s fragile economic recovery.
“I don’t think the BOJ has technically reached the limits (of monetary easing). But it’s hard to come up with steps with positive effects that outweigh the long-term demerits,” he told reporters after meeting with business leaders in the western coastal city of Kanazawa on Thursday.
Earlier he said the prolonged period of ultra-low interest rates brought about by the BOJ’s asset purchases and the negative rates decision had destabilised the bond market and damaged the central bank’s credibility.
“The additional (positive) effects of quantitative and qualitative easing have been diminishing,” he told the business leaders. “On the other hand, numerous side effects of QQE seem to be increasing steadily,” he said.
Kiuchi’s views are not shared by the majority on the BOJ’s nine-member board, but his doubts over Governor Haruhiko Kuroda’s radical stimulus policies are gradually gaining support among lawmakers and policymakers, including some at the bank.
The BOJ’s policies are aimed at ending two decades of deflation and stagnant growth, but nearly three years of aggressive money printing has failed to accelerate inflation, which fell for the second straight month in April as external headwinds discouraged firms from raising wages and keep households from spending.
The shock decision on negative interest rates, which Kiuchi voted against, had impaired the credibility of the bank’s monetary policy by reducing the predictability of its actions, he said.
The move has also failed to address an unwelcome rise in the yen, while Japanese shares have weakened, drawing criticism that the BOJ had succeeded only in confusing rather than calming markets.
By persisting with its pledge of hitting 2 percent inflation at the earliest possible date, Kiuchi said the BOJ was creating “overly heightened market expectations” of additional easing.
“The BOJ shouldn’t aim at achieving its 2 percent inflation target with monetary policy alone in the short term,” he said.
“Rather, it should reset the timeframe for achieving the target to a medium- and long-term one, and conduct monetary policy in a flexible manner.”
Over-reliance on ultra-loose monetary policy has also hampered necessary structural reforms and may be working to push down, not boost, Japan’s already low productivity and potential growth, Kiuchi said.
“Japan’s economy is suffering from supply-side problems rather than a lack of demand … and supply-side problems can’t be solved by monetary policy,” he said.
A former market economist, Kiuchi has been the sole opponent of the BOJ’s massive asset-buying programme and has called for it to be tapered.
(Reporting by Leika Kihara; Editing by Chang-Ran Kim and Will Waterman)