BOJ’s Iwata: impossible to tighten policy as a result of Sept review

By Stanley White and Minami Funakoshi

YOKOHAMA, Japan (Reuters) – The Bank of Japan has no plans to reduce the amount of assets it buys or change the composition of assets it purchases in a way that would tighten monetary policy, Deputy Governor Kikuo Iwata said on Thursday.

The BOJ’s comprehensive review of its monetary policy due next month is unlikely to lead to a big change in thinking but is more about fine-tuning existing policy, he said.

Iwata defended the BOJ’s mix of government debt purchases, negative interest rates and purchases of assets linked to the stock market but said he wanted to study what the best combination of these policy tools is to boost inflation.

His stance suggests the BOJ will not opt for a radical overhaul that some economists say is needed to prevent the risks of its unconventional policies from deepening.

“It is impossible for this review to lead to a reduction in asset purchases or a change in the composition that would cause tightening,” Iwata told reporters after meeting business leaders in Yokohama.

“The overall direction of our policy is not mistaken. I want this review to be about making small and delicate adjustments to policy.”

The BOJ currently buys 80 trillion yen ($788.4 billion) a year of Japanese government bonds in a bid to help get inflation to 2 percent. The price target, delayed several times, is now fiscal 2017.

The central bank, which has a minus 0.1 percent interest rate, increased purchases of exchange-traded funds (ETFs) at a meeting last week to an annual rate of 6 trillion yen.

Consumer prices are falling at the fastest pace since the BOJ began its quantitative easing in early 2013, a signal to many economists that its policies are not working.

POLICY ‘NOT WRONG’

On Thursday, Economy Minister Nobuteru Ishihara came to the BOJ’s defense, saying monetary policy “has not been wrong”.

“It’s definitely not deflation, if you look at core-core” inflation index, which excludes food and energy prices, Ishihara told reporters.

“It’s just that we haven’t reached our target (of 2 percent inflation). That’s why we need an economic stimulus now, and rev up the engine to escape (deflation).”

The government finalised a fiscal spending package worth more than 28 trillion yen this week in a bid to kickstart growth, which some economists say keeps pressure on the BOJ to pursue monetary policy in tandem with government spending.

The BOJ’s announcement last week that it will review its policy triggered the worst sell-off in government bonds in more than three years.

Some investors say the BOJ’s bond purchases are so large that they cannot continue beyond the next few years. The negative interest rate policy has proved unpopular because it hurts bank earnings and depresses already low deposit rates.

In a speech earlier on Thursday, Iwata said he wanted the policy review to study the transmission mechanism and obstacles to quantitative easing, but the review is not meant to transmit a specific direction for monetary policy.

Iwata said earlier the combination of fiscal spending with the BOJ’s QQE easing was not equivalent to so-called “helicopter money” or the monetization of government debt.

(Reporting by Stanley White; Editing by Chang-Ran Kim and Richard Borsuk)