Bank of Japan may still opt for huge JGB buys, when it acts: Suda

Mon Apr 21, 2014 6:54am EDT
 
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By Leika Kihara

TOKYO (Reuters) - The Bank of Japan is likely to hold off on expanding monetary stimulus for as long as possible but when it does act, it will take "extraordinary" steps such as buying government bonds on a massive scale, a former central bank policymaker said on Monday.

Miyako Suda, who served on the BOJ board for a decade until 2011 and helped to plot Japan's battle against deflation, added that despite some initial success the central bank is unlikely to meet its inflation target, since it is unclear how its huge asset purchases would lead to higher inflation expectations.

"The BOJ will probably maintain its bullish price forecast for as long as possible and keep policy unchanged until it becomes absolutely impossible to continue arguing that its price target can be met," Suda told Reuters in an interview.

"But once he feels something must be done, I think Governor (Haruhiko) Kuroda will do something quite extraordinary because small steps won't work," said Suda, who is now special adviser at the Canon Institute for Global Studies, a private think tank.

The BOJ has stood pat on monetary policy since deploying an intense burst of stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in roughly two years.

Kuroda has repeatedly said Japan is on track to meet the price target as consumer inflation, which hit 1.3 percent in February, will accelerate due to improvements in the economy. But markets are unconvinced that inflation will accelerate much from here and are betting on another stimulus around July.

Suda warned of the difficulty of changing public perceptions about future price moves with monetary policy, arguing that there is no clear evidence that flooding markets with cash can heighten inflation expectations.

By offering massive stimulus in a single blow last April to shock markets, the BOJ has left itself with few steps to revive the economy and made future policy "very difficult," Suda said.   Continued...

 
A security guard salutes at the entrance of the Bank of Japan building in Tokyo January 22, 2014. REUTERS/Yuya Shino