NAHA • Bank of Japan (BOJ) deputy governor Hiroshi Nakaso has put the onus on the government to speed up structural reforms to boost the country's growth potential and maximise the economic impact of the bank's massive monetary stimulus programme.
He also said market pessimism over Japan's economic outlook was overblown, stressing the BOJ has room to expand stimulus further either by adding to its large asset purchases or pushing interest rates further into negative territory.
"Although global financial markets have been volatile since the turn of the year, I believe there is no need to be too pessimistic as the fundamentals of Japan's economy have been firm," Mr Nakaso told business leaders yesterday in Naha, a city in the southernmost Japanese prefecture of Okinawa. He stressed that the BOJ needed more time to gauge how its decision to adopt a 0.1 per cent negative interest rate would affect the economy.
But he also said the BOJ's monetary efforts must be accompanied by growth strategies to address long-term woes such as a rapidly dwindling working-age population - the third arrow of Premier Shinzo Abe's "Abenomics" stimulus policies.
"Monetary policy to overcome deflation and the structural reform to raise the potential growth rate must be pursued in tandem to bring Japan's economy back on track towards sustained growth," Mr Nakaso said.
"Now that the BOJ has taken monetary easing one step further... I hope the third arrow of Abenomics, the growth strategy, will fly higher and faster."
The BOJ unexpectedly cut a benchmark interest rate below zero in January, stunning investors as it struggles to stimulate the economy in the face of volatile markets and slowing global growth.
But the move has drawn criticism from lawmakers for failing to stem an unwelcome rise in the yen. Four of the BOJ's nine board members voted against the decision, questioning whether pushing down already low borrowing costs would boost growth.
Mr Nakaso, who voted for the January easing, said negative rates will stimulate demand and spur investment by underscoring the BOJ's determination to achieve its 2 per cent inflation target.
He also dispelled concern that negative rates would hurt financial institutions' profits, stressing that the BOJ will charge 0.1 per cent interest only to about 10 trillion yen (S$122 billion) of the roughly 260 trillion yen in reserves parked with the central bank.
Japan's economy shrank more than expected in the final quarter of last year as consumer spending and exports slumped, and some analysts believe that conditions have remained weak so far this year. Private business activity surveys showed both factory and service sector growth slowed markedly last month to their lowest levels since last summer.
REUTERS
