BOJ Must Be Cautious About Changing Easy Money Policy Too Soon

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By Tetsushi Kajimo and Yoshifumi Tomoto

Takehiko Nakao, a former senior financial diplomat, told Reuters that the Bank of Japan should not change its unconventional monetary policies for now due to financial market uncertainties caused by problems with Western banks.

Nakao's comments came amid speculation that the BOJ could abandon its policy of yield curve control when the new governor Kazuo Ueda succeeds Haruhiko Kuroda, who will finish his term on April 8.

Financial markets have become more risk-averse due to the failure of U.S. banks and UBS's purchase of Credit Suisse last month.

Nakao said that the BOJ should carefully monitor the market's developments for the time being, even though credit anxiety is unlikely to turn into anything similar to the global financial crisis of 2008/09.

As financial markets stabilize, Japan must begin to normalise fiscal and monetary policy, as prolonged stimulus hinders corporate restructuring and job turnover.

Nakao, a former vice minister of finance for international affairs who worked with other countries to respond to the euro crisis of the 2010s, said that the BOJ might need to tread more carefully in rethinking and adjusting its monetary policy.

The BOJ can't continue its unconventional monetary policies, such as ETF and REIT purchase and YCC indefinitely. It's not in Japan's long-term interest to do so.

Nakao was talking about the central bank's policy of targeting the yield curve on bonds and the purchase of assets like exchange-traded fund and real estate investment trust.

Nakao, in an interview conducted Thursday, said that the risks of a prolonged ease in Japan include excessive yen weakness and deterioration in fiscal discipline.

The BOJ's assets and fiscal deficits have grown so large compared to GDP, that there is a risk of interest rate increases and currency drops. This could lead to inflation.

Nakao served as the president of the Asian Development Bank between 2013 and early 2020. He is currently "Chairman the Institute" of Mizuho Research and Technologies. Mizuho Financial Group Inc., Japan's largest commercial bank, is part of Mizuho Financial Group Inc.