BOJ policymaker calls for vigilance on costs of ultra-easy policy

TOKYO/YOKOHAMA: The Bank of Japan (BOJ) must always stand ready to mitigate the side-effects of prolonged monetary easing, even as it maintains massive stimulus, board member Hajime Takata said on Thursday.

Takata said he saw no immediate need to take additional steps to iron out market distortions caused by the bank’s heavy intervention in the bond market. But he said the BOJ “obviously” needed to be mindful of the cost of ultra-loose policy, such as the strain it is causing on financial institutions’ profits and bond market function.

“On balance, the benefits of ultra-loose policy have exceeded the costs,” Takata told a news conference after meeting business executives in Yokohama. “But we must continue to humbly scrutinise the side-effects and be ready to respond,” he said.

“We always need to think about the balance (of the benefits and costs) in making policy decisions,” said Takata, a former bond market analyst. With inflation exceeding the BOJ’s 2% target, market bets of a near-term interest rate hike have forced the bank to ramp up bond buying to defend its cap set for the 10-year bond yield.

In December, the central bank stunned markets by widening the band around the 10-year yield target in a move that allowed the yield to rise to 0.5% from the previous 0.25%.

But the bank’s quarterly survey showed on Wednesday an index measuring the degree of bond market functioning hit a record low in February, a sign the December decision has done little to ease market distortions.

“It will take a certain amount of time to gauge the impact of the tweak we made to YCC on market function,” Takata said, adding that he hoped the bank could mend distortions with existing market operation tools.

Markets participants have been trying to gauge whether the BOJ will phase out its stimulus by adjusting its bond yield control policy when incumbent Governor Haruhiko Kuroda’s second five-year term ends in April.

Incoming BOJ head says jump in trend inflation needed to tighten policy

In a speech delivered to Yokohama business leaders before the briefing, Takata said the BOJ must “patiently” maintain its ultra-loose monetary policy, as Japan has yet to see inflation sustainably hit the bank’s 2% target backed by wage hikes.

While Japan’s economy is headed for a moderate recovery, it faced risks such as slowing global demand that could discourage companies from raising wages, Takata said.

“While we need to be mindful of the impact of our massive stimulus programme on market function, we’re at a stage where we need to patiently maintain monetary easing,” he said.