SHIZUOKA, Japan — Bank of Japan (BoJ) policy maker Makoto Sakurai on Thursday warned against “recklessly” ramping up stimulus just to prop up prices, blaming soft inflation on structural factors that were positive for the economy.
Sakurai said the BoJ’s attempt to hit its 2% target has been hampered by companies’ efforts to boost productivity, as they cope with labor shortages by investing in automation rather than raising wages.
“Improvements in productivity aren’t necessarily bad for the economy. As such, it’s undesirable to expand stimulus further just to deal with weak price growth,” Sakurai said.
“We shouldn’t recklessly seek to achieve our price target with additional easing because doing so could accumulate imbalances in the economy,” he said in a meeting with business leaders in Shizuoka, eastern Japan.
In a news conference after the meeting, Sakurai said the BoJ may consider taking steps to mitigate the demerits of prolonged easing, if doing so becomes necessary in the future.
But he said the central bank did not need to take such steps now nor ramp up stimulus, as more data was needed to decide the next appropriate move might be.
“If necessary, the BoJ will consider taking action that could involve steps beyond the existing policy framework. It could be something within the framework. In any case, that’s something we’ll consider when the time comes,” Sakurai said.
The remarks highlight a longstanding rift between those in the nine-member board who, like Sakurai, are wary of the rising cost of prolonged easing, and those who feel the central bank can do more to fire up inflation.
A former academic, Sakurai said the stress the BoJ’s easy policy is inflicting on financial institutions is increasing.
At the same time, heightening economic uncertainties could increase the need for additional stimulus, he added.
A scheduled domestic sales tax hike in October could hurt the economy if global growth does not pick up by then, he said.
“We don’t need to take additional easing steps now. We can watch developments for the time being. If economic developments take a turn for the worse, we may consider taking action,” he said. “The decision will be data-dependent.”
TOUGH DECISION AHEAD
The BoJ is in a bind. Years of heavy money printing have failed to drive up inflation, forcing it to maintain a radical stimulus program longer than expected and leaving it with little ammunition to fight the next recession.
Ultra-low interest rates are also straining profits of regional banks by narrowing the margin they earn from lending, stoking fears some may face financial trouble in coming years.
Under a policy dubbed yield curve control, the BoJ guides short-term rates at minus 0.1% and long-term rates around zero.
Concerns that escalating trade tensions could hurt global growth drove investors into the safety of government bonds, pushing Japan’s 10-year bond into negative territory.
Sakurai said the drop in bond yields was not a problem yet because they remained within a range the BoJ saw as acceptable.
But he said the BoJ could face a tough balancing act trying to keep the economy afloat, while addressing the rising cost of ultra-low rates.
“We need to consider the side-effects of our policy more than ever before,” Sakurai said. “We also need to look out for the economy. The biggest question is which one to prioritize.” — Reuters