BOJ’s Sato criticizes negative rates, urges flexible policy framework

Bank of Japan board member Takehiro Sato criticized the central bank’s negative interest rate policy as counter-productive and urged the BOJ to adopt a policy framework more suited for a long-term battle to beat deflation.

He also said the BOJ should not persist in achieving its 2 percent inflation target “at all cost” as price rises unaccompanied by wage gains would cool consumption, suggesting his opposition to any further monetary expansion.

Sato, a former bond market strategist who voted against the BOJ’s January decision to adopt negative rates, said on Thursday the concept of charging banks for holding excess reserves had pushed down bank stocks and had hurt household confidence.

“Opinions are divided on the economic effects of the negative interest rate policy, and this is fuelling worries among the public,” Sato said in a speech to business leaders in Kushiro, northern Japan, adding that he was skeptical of the idea that negative rates would boost capital expenditure.

The remarks drove down the dollar/yen, already on a shaky footing on wavering market conviction of a U.S. interest rate hike this month, as some investors trimmed bets for near-term BOJ action. Japanese stocks suffered their biggest daily percentage drop in a month due to the hit from a strong yen.

Sato’s views run counter to those of BOJ Governor Haruhiko Kuroda, who has expressed readiness to ease again to hit 2 percent inflation at the earliest date possible.

WAR OF ATTRITION

Japan’s historic move in early February to adopt negative rates failed to boost stock prices or arrest an unwelcome rise in the yen, drawing criticism from lawmakers for confusing, rather than calming, markets.

In the first and boldest criticism made publicly by a BOJ policymaker, Sato said negative rates could hurt Japan’s banking system by hitting financial institutions’ already narrowing margins and could even cause them to reduce lending.

“I believe the negative rate policy has the effect of monetary tightening, rather than easing,” he said. “When financial institutions face a negative spread, it’s reasonable for them to shrink their balance sheet rather than expand it.”

He told reporters after the meeting with business leaders that he was “clearly opposed” to deepening negative rates.

Sato’s remarks underscore the resistance Kuroda may face if here were to propose expanding stimulus further.

Sato reiterated his view that the BOJ should consider its 2 percent inflation target as a long-term goal with room for flexibility, rather than one with a rigid deadline.

That meant the BOJ should modify its current massive asset buying program, which was intended to be a short-term move aimed at shocking the public out of its deflationary mindset.

“The challenge now is to reform the current framework, which is intended to provide solutions in the short term, to one that is better suited for a war of attrition,” he said.

For a start, the BOJ should take a more flexible approach in meeting its base money target to avoid disrupting Japan’s banking system through excessive money printing, he said.

“My belief is that 2 percent inflation is too high a level to aim for given Japan’s low potential growth.”

Source: Reuters