Bank of Japan Deputy Governor Kikuo Iwata ruled out using its policy ammunition to deal with temporary market turbulence, signalling that it would take a long-term decline in price expectations for him to consider additional monetary easing. Iwata, a vocal advocate of reflationary policies, also said that if the central bank were to boost asset purchases in the future he would favour government bonds over risky assets, given the huge size of the Japanese government bond (JGB) market.
The BoJ stunned financial markets on April 4 by setting in motion an intense burst of monetary stimulus, promising to double its bond holdings in two years and boost purchases of risky assets in an attempt to jolt the economy out of deflation. Some market players have speculated that the central bank may boost purchases of riskier assets, such as trust funds investing in stocks and property, if recent market turbulence persists and threatens the prospects of an economic recovery.
But Iwata, who joined the BoJ with Governor Haruhiko Kuroda in March as one of his two deputies, said he would focus on long-term price expectations in judging whether further monetary stimulus was necessary. "We still have policy options. Still, I wouldn't say that downside risks have increased unless price expectations showed long-term declines," Iwata told Reuters on Monday in an exclusive interview, his first since taking office.
"I'm focusing on whether Japan can achieve 2 percent inflation in a very stable and long-term manner. The economy can temporarily undershoot. This happens all the time. It could also temporarily overshoot. We have to look at the long-term." A 70-year-old former economics professor, Iwata has long blamed BoJ hesitation for prolonging the deflation that has dogged Japan for nearly two decades, and has argued that the bank can beat deflation alone if it pumps enough money into the economy.
His ideas have served as a backbone of the BoJ's unprecedented easing moves, such as setting a two-year timeframe for achieving its 2 percent inflation goal and buying assets aggressively under a policy targeting base money - the total amount of cash and bank deposits - instead of interest rates. Financial markets have rallied strongly since Prime Minister Shinzo Abe highlighted his brand of aggressive policymaking late last year, followed by the BoJ's announcement in April.
But Japanese shares are now lower than when the BoJ unveiled its stimulus, casting doubt on the bank's reflationary tactics that rely heavily on lifting sentiment and confidence. The yen is stronger against the dollar, worrying exporters, while the massive scale of the BoJ's buying jolted markets and nudged bond yields above levels before April 4. Iwata sounded unfazed by what he saw as a temporary move in markets that were still coming to terms with the bank's massive monetary easing, stressing that the recent market moves have yet to hurt the economy enough to warrant additional stimulus. "It's important for central banks to communicate well its policy intention to markets. But they must not be unsettled by market moves," he said.
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