TOKYO: Bank of Japan needs to ease monetary policy by buying longer-dated government bonds and foreign assets to weaken the yen and remove a key obstacle to Japan's emergence from more than a decade of deflation, a former Bank of Japan deputy governor said.
"Risks to Japan's economy are heightening, so further monetary easing is necessary," Kazumasa Iwata, the former deputy governor, told Reuters in an interview on Monday.
Iwata is a member of a government panel that helps frame long-term economic policies and is regarded as a strong candidate to succeed Bank of Japan Governor Masaaki Shirakawa when his term expires in April next year.
Iwata said the global economic slowdown is hurting Japanese exports and output, while consumer spending has begun to lose support from government stimulus measures.
Japan's core consumer prices fell 0.3 percent in July from a year earlier, and Iwata said that it would be difficult for the central bank to achieve its 1 percent inflation target set in February.
"With the yen so strong now, it's extremely hard for Japan to beat deflation," he said.
The yen's persistent strength also means Japanese exporters have no choice but to offset the pain with cuts in wages and prices of their goods, aggravating deflation, Iwata warned.
During his five-year stint at the BoJ until 2008, Iwata was seen as one of the board members most keen to expand monetary stimulus.
He served as deputy governor when the central bank exited from quantitative easing. But he opposed raising interest rates in 2007, arguing that it was premature with Japan barely out of deflation.
Currently head of the Japan Center for Economic Research, a private think tank in Tokyo, Iwata said the BoJ should buy huge sums of longer-dated Japanese government bonds (JGB) under its asset-buying programme, and consider buying foreign bonds to weaken the yen.
"Policymakers sometimes make mistakes and among them is to under-estimate the severity of the problem," Iwata said. "We're now undergoing a big (global financial) shock, which means Japan needs bolder monetary easing, he said.
Japan's economy has outpaced growth of most G7 countries thanks to robust private spending and expenditure on reconstruction following last year's earthquake and tsunami.
But exports in July suffered their sharpest drop since January as demand in Asia slumped, and many BoJ officials now fear that the recovery may be delayed.
Having eased policy in February and April, however, the central bank has stressed that it will act again only if risks to the economy heighten sharply.
The BoJ next meets for a rate review on Sept. 18-19.
BOLDER STEPS NEEDED
As a member of the government panel steering long-term economic policy, Iwata caused a stir last year by proposing that the BoJ set up a 50 trillion yen ($639 billion) fund to buy foreign bonds to weaken the yen.
The proposal has not made much headway due to opposition by the finance ministry, which has the last word on currency policy.
But the proposal made Iwata a favourite candidate to become the next BoJ governor among lawmakers who feel the central bank should take bolder steps to beat deflation, which is hampering consumer spending and business investment.
Iwata said he was sticking to the proposal, arguing that by using the fund to buy euro-zone bonds, Japan would both weaken the yen and help Europe battle its debt crisis.
Iwata's idea came under renewed focus after Takehiro Sato, who joined the BoJ's policy-setting board in July, said purchasing foreign bonds could be a future policy option.
In 2010, the BoJ created as a key monetary easing tool an asset-buying fund targeting government bonds and private assets, but not foreign bonds. It topped up the fund several times, including February and April this year, but has held fire since then.
BoJ officials argue that the central bank should save its ammunition for as long as possible, as the bank is already struggling to force-feed cash to markets already awash with extra cash.
But Iwata said that by targeting longer-dated JGBs, the central bank should be able to pump more cash into the market.
Under its asset-buying programme, the BoJ now buys government bonds with up to three years until maturity, and it has been hesitant to target longer-dated bonds for fear that it would make exiting the ultra-easy policy more difficult.
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