NAGOYA – Bank of Japan Gov. Haruhiko Kuroda reiterated Monday that policymakers will be more mindful of the rising cost of prolonged stimulus, though the central bank chief ruled out the chance of a near-term interest rate hike.
Kuroda said there is “no reason” now for the BOJ to follow in the footsteps of its U.S. counterpart in normalizing policy with inflation still distant from its 2 percent target.
The governor, however, said that in keeping monetary conditions loose, the BOJ must now focus more on addressing the fallout of ultra-low rates such as the strains on financial institutions.
“The BOJ fully recognizes that, by continuing monetary easing, financial institutions’ strength will be cumulatively affected,” Kuroda said in a speech to business leaders in Nagoya.
“Although these risks are judged as not significant at this point … the BOJ will scrutinize developments and encourage financial institutions to take action as necessary,” he said.
The remarks suggest the bank will maintain the status quo on monetary policy for the time being, and make only minor tweaks to its program when needed to address the rising costs of easing.
The key will be to make the BOJ’s stimulus program as sustainable as possible, so it can keep stimulating the economy without destabilizing the banking system, he said.
“Unlike in the past, Japan is no longer in a situation where decisive, large-scale policy is needed to overcome deflation,” Kuroda said, dismissing the chance of deploying another huge stimulus program even if the economy deteriorates.
“It’s necessary to persistently continue with powerful monetary easing while looking at the positive effects and side effects in a balanced manner.”
The rising cost of prolonged easing was the focus of debate at the BOJ’s rate review in September, with one Policy Board member warning that there was a limit to how long the stimulus could be sustained, according to minutes released Monday.
“One member said there was room to make the BOJ’s policy framework more flexible in the future” if the economy continues to expand, the minutes showed.
Subdued inflation has forced the BOJ to maintain its radical stimulus program even as years of low rates hurt financial institutions’ profits and dried up bond market liquidity.
The bank took steps in July to make its policy more sustainable, such as allowing bond yields to move more flexibly around its zero percent target. But the measures have done little to ease the pain on financial institutions.
“Profits from core lending operations could continue falling. From a long-term perspective, regional banks could see their business environment deteriorate further,” Kuroda said.
But the BOJ’s policy alone cannot fix structural problems that darken the business prospects for regional banks, such as a dwindling population and a lack of funding demand, he said.
“The BOJ will of course seek an exit from its massive stimulus when its 2 percent inflation target is met. That will steepen the yield curve and interest rates will rise,” he said.
“But that alone won’t solve challenges for banks.”