BOJ could start debate on withdrawal of stimulus in 2023, ex-banker says

  • The BOJ could start a debate around 2023 on the end of negative rates – Maeda
  • The end of the negative rate will not be the start of the rate hike cycle – Maeda
  • BOJ will stick to performance cap to keep cost of government spending low
  • With the March exam, YCC is expected to last another 3-5 years

TOKYO, June 17 (Reuters) – The Bank of Japan may be able to start discussing ways to phase out its extraordinary stimulus package, for example by dropping negative interest rates, in 2023, the former said. central bank executive Eiji Maeda.

Such a decision would put the BOJ in line with other central banks gradually considering an exit from crisis policies. The U.S. Federal Reserve on Wednesday baffled investors by telling them it could start raising rates in 2023, sooner than it previously reported. Read more

Discussions about dropping negative rates would only emerge if the Japanese economy returned to pre-pandemic levels and inflation reached nearly 1%, said Maeda, who, as the executive director of the BOJ, oversaw the development of its policy until May 2020.

The BOJ may start raising rates before reaching its 2% inflation target, which should be seen as a “very long timeframe” target, as Japan’s persistent deflationary mentality could prevent it from reaching it for a while. more 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 policies rather than the start of a crisis. a full-blown rate hike cycle. .

“If the BOJ is lucky, the debate (over the rate hike) could start around 2023,” Maeda told Reuters in an interview on Wednesday.

“But it will not be political normalization. It will simply be a shift from extraordinary stimulus to more lasting monetary easing,” he said.

The BOJ is already slowing its purchases of bonds and risky assets, but could potentially end purchases of exchange-traded funds (ETFs) as part of its efforts to slow the recovery, Maeda said.

Such moves would coincide with the end of Governor Haruhiko Kuroda’s term in April 2023 and push the bank further away from its policies to support inflation with huge stimulus measures that began 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 while raising short-term rates, said Maeda, who remains in close contact with officials in place and has an in-depth knowledge of the thinking behind BOJ’s policy making.

After years of heavy money printing failing to bring inflation back to its 2% target, the BOJ switched to Yield Curve Control (YCC) in 2016, under which it set a target of -0.1% for short-term rates and caps 10-year bond yields around 0%.

Faced with 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 accumulated side effects of a prolonged easing.

Maeda, currently the head of think-tank Chibagin Research Institute, said the March review, which created a program to compensate banks for the blow of years of ultra-low rates, helped extend the term of the life of YCC.

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

Reporting by Leika Kihara; Additional reporting by Takahiko Wadao Editing by Chang-Ran Kim

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