TOKYO • Japan's central bank is already in the process of winding down its radical monetary policy and may also look at making changes to its long-term interest rate target in the near future, former board member Takahide Kiuchi said yesterday.
While governor Haruhiko Kuroda may persist in achieving his 2 per cent inflation target, his bureaucrats will seek to water down the target as Mr Kuroda's term expires next April and the cost of its massive stimulus rises, Mr Kiuchi said.
"The Bank of Japan (BOJ) has already begun normalising policy since it shifted to yield curve control (YCC) last year, and that's the direction the bank seems to heading," he told Reuters.
Mr Kiuchi, who ended his tenure as board member in July, was the sole proponent of tapering the BOJ's asset purchases and had long warned of the pitfalls of Mr Kuroda's monetary experiment.
Many of Mr Kiuchi's criticisms have now gained support among some market participants, lawmakers and central bankers, including his caution over setting a binding timeframe for hitting the BOJ's elusive price target.
With inflation still subdued despite years of ultra-loose policy, the BOJ could re-define its inflation target to a more flexible one aimed over a longer timeframe, said Mr Kiuchi, who is now executive economist at Nomura Research Institute.
The BOJ may also switch its long- term interest rate target to one targeting three or five-year yields from the 10-year yield, as the shorter end of the curve is easier to control with fewer bond purchases, he added.
"YCC is a very fragile framework that won't be sustainable once the economy is hit with an external shock," Mr Kiuchi said. "Reviewing YCC and targeting yields for bonds with a shorter duration is an option. It's possible this could happen."
Under a policy framework set last September, the BOJ guides short- term rates to minus 0.1 per cent and the 10-year bond yield around zero per cent. It also has a loose pledge to buy bonds so its holdings increase at an annual pace of 80 trillion yen (S$989 billion). But it has recently been slowing purchases to around 60 trillion yen as its huge purchases drain bond market liquidity.
Mr Kiuchi warned the BOJ must further slow its buying to around 45 trillion yen per year, as the current pace of 60 trillion yen would mean purchases hit the limit around the middle of next year.
If the economy needs further monetary support, the only step left for the BOJ could be to abandon YCC and ramp up bond buying to finance big fiscal spending by the government, he said.