Kuroda’s easing ‘incomprehensible’ to ex-Bank of Japan chief economist
November 29 2014 07:46 PM
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Hayakawa: Apprehensive about Japan’s monetary policy.
Hayakawa: Apprehensive about Japan’s monetary policy.

Prime Minister Shinzo Abe has tied the Bank of Japan’s hands with a delay in a sales-tax increase that’s hurt confidence in the nation’s finances, a former chief economist at the central bank said.

Damaged trust in Abe’s pledge to cut the deficit will make it “extremely difficult” for the BoJ to exit record stimulus without risking a bond yield surge, Hideo Hayakawa said in an interview on Friday. More easing would also be tough because Governor Haruhiko Kuroda effectively has made fiscal improvement a premise for further monetary stimulus, he said.

The BoJ’s expansion of asset purchase plans on October 31 was “totally incomprehensible,” and could only be seen as a move aimed at paving the way for Abe to give the final go-ahead to a tax increase, said Hayakawa. Even so, little more than two weeks later, Abe decided to delay the 2015 tax boost.

The criticism from Hayakawa, who left the BoJ 20 months ago, underscores an escalating debate in Japan over Kuroda’s unprecedented easing and the higher living costs and weaker yen it’s produced. The main political opposition says it favours a more flexible stance by the central bank, as the nation heads to a general election next month.

The BoJ is targeting 2% inflation as part of a pact that it struck with the government last year that calls for efforts to strengthen public finances, Abe’s domain. Without moves to rein in the world’s largest debt burden, BoJ purchases of government bonds risk being perceived as funding public spending.

“The Bank of Japan got itself in a bind – that’s a Catch-22,” said Hayakawa, 60, who was a BoJ executive director until March 2013 and is now a senior executive fellow at Fujitsu Research Institute. “When inflation approaches 2% in about a year and a half, the BoJ will be strapped – that’s the biggest risk.”

Abe on November 18 delayed a boost in the consumption levy to 10% until April 2017, from the original October 2015 plan. An increase to 8% in April this year tipped Japan into a recession. The prime minister also called an election, set for December 14, to secure a fresh mandate for Abenomics. Hayakawa said that even with the stepped-up asset-buying plan unveiled last month, the BoJ won’t meet its inflation goal by next spring, which is two years from Kuroda’s first stimulus injection. Since the bank already has modified its two-year time frame to sometime in the fiscal year that starts in April, there was no need to rush and ease more on October 31, he said.

The BoJ’s 5-4 vote last month highlighted Kuroda’s weakened control over the policy board, he said.

Kuroda repeatedly said the central bank would act without hesitation should risks to achieving its inflation goal be threatened. The central bank cited danger that weaker demand after April’s tax bump and cheaper oil could delay an end to Japan’s “deflationary mindset” when it boosted easing on October 31.

Economic data on Friday showed that consumer spending continues to labour under the hit from the 3 percentage-point increase in the sales tax. Retail sales slid 1.4% in October from the previous month. Household spending, a broader measure, is down 4% from its level a year ago.

Consumer prices, stripped of the impact of this year’s tax rise and the volatile fresh-food category, rose 0.9% from a year earlier – less than half the BoJ’s targeted pace.

Speaking before Friday’s releases, Hayakawa said that the economy was bouncing back from its mid-year slump and inflation would pick up again, predicting price gains will head toward the BoJ’s target from 2016 as the effect of weaker oil prices fade and while a cheaper yen continues to underpin imports costs.

The price of Dubai crude oil – a benchmark for Middle East supply to Asia – has lost about a third from this year’s peak in June as of November 26. Japan’s gasoline prices declined for a 19th straight week to ¥158.3 per litre last week, according to the trade ministry.

The decline in oil prices is a “huge positive” for the economy as Japan spends about ¥28tn ($237bn) annually on fuel imports, he said.

After putting off the 2015 tax increase, the government has to take steps to curb rising social security costs and show how it will improve its finances or its fiscal position will become “perilous,” Hayakawa said.

 

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