Fiscal policy must play key role in supporting Japan economy: ex-BoJ exec

TOKYO: Fiscal policy must play a key role in supporting Japan’s economy if overseas risks threaten to derail a fragile recovery, as the central bank has little left in its policy tool kit, a former Bank of Japan (BoJ) executive said on Monday.

Kazuo Momma, who retains close contact with current BoJ officials, said it would be best if the central bank refrained from expanding an already massive stimulus for as long as needed, given the rising cost of prolonged easing.

But if the BoJ is forced to address an abrupt yen spike that hurts

Japan’s export-reliant economy, the only option left would be to push short-term interest rates deeper into negative territory, said Momma, who is now an executive economist at private think tank Mizuho Research Institute.

Momma oversaw monetary policy and international affairs during his stint at the central bank, and his views are closely watched by policymakers and market participants.

“If it turns out that the economy needs further support, it ought to come from fiscal policy,“Momma said, adding the government still had room to ramp up spending if external shocks cool demand and tips the economy into recession.

“As for monetary policy, the only feasible and possible tool the BoJ has left going forward is to deepen negative rates,“he told Reuters.

If the BoJ were to ease further, it will likely accompany the move with measures to ease the strain ultra-low rates have placed on financial institutions, Momma said.

Under a policy dubbed yield curve control (YCC), the BoJ guides short-term rates at -0.1% and the 10-year bond yield around 0%.

Years of heavy money printing has failed to fire up inflation to the BoJ’s 2% target, forcing it to maintain a massive stimulus despite the rising strain ultra-low rates is inflicting on financial institutions’ profits.

With the economy showing signs of weakness, the government has compiled a US$122 billion (RM505 billion) fiscal package as a preemptive step to ward off heightening overseas risks.

Momma said while Japan will likely avert a recession next year, core consumer inflation will hover around 0.5% to 1% – well short of the BoJ’s target. – Reuters