BOJ may start debate on stimulus retreat in 2023, former c.banker says

The Bank of Japan may be able to start debating ways to phase out its extraordinary stimulus programme, such as by ditching negative interest rates, in 2023, said former central bank executive Eiji Maeda.

Such a move would put the BOJ in line with other central banks gradually eyeing an exit from crisis-mode policies. The U.S. Federal Reserve unnerved investors on Wednesday with indications it could begin raising rates in 2023, earlier than it had signalled previously.

Discussions on abandoning negative rates would only emerge if Japan’s economy returns to pre-pandemic levels and inflation perks up to near 1%, said Maeda, who as BOJ executive director oversaw its policy drafting until May 2020.

The BOJ can start raising rates before hitting its 2% inflation target, which must be seen as a goal with a “very long timeframe” since Japan’s sticky deflationary mindset may prevent achievement of it for another decade, he said.

And if the central bank raises rates, it will only move the short-term rate target to around 0.0%-0.5% in what will be a modest reversal of crisis-mode policies rather than the start of a full-fledged rate-hike cycle.

“If the BOJ is lucky, debate (on raising rates) could begin from around 2023,” Maeda told Reuters in an interview on Wednesday.

“But this won’t be policy normalisation. It will merely be a shift away from an extraordinary stimulus towards a more sustainable monetary easing,” he said.

The BOJ is already slowing its bond and risky asset buying but could eventually end purchases of exchange-traded funds (ETF) as part of its efforts to dial back stimulus, Maeda said.

Any such moves would coincide with the end of Governor Haruhiko Kuroda’s term in April 2023, and would push the bank further from his policies aimed at propping up inflation with huge stimulus that kicked off in 2013.

Given the need to keep borrowing costs low for government spending, the BOJ will likely maintain its cap on long-term rates even upon hiking short-term rates, said Maeda, who retains close contact with incumbent officials and has deep knowledge on the thinking behind BOJ policy crafting.

After years of heavy money printing failed to fire up inflation to its 2% target, the BOJ shifted to yield curve control (YCC) in 2016 under which it sets a -0.1% target for short-term rates and caps 10-year bond yields around 0%.

Facing criticism for hurting bank profits with negative rates, the BOJ was forced in March to conduct a review of its policy tools to deal with the accumulating side-effects of prolonged easing.

Maeda, currently head of think tank Chibagin Research Institute, said the March review, which created a scheme to compensate banks for the hit from years of ultra-low rates, had helped extend the lifespan of YCC.

“With the review, the BOJ probably laid the groundwork for a post-Kuroda monetary policy,” he said. “YCC has been made sustainable for another three to five years.”

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