BOJ policymaker Sakurai sets high bar for additional easing

MACROECONOMICS - KOBE. Japan's central bank would only consider expanding stimulus if overseas risks triggered a financial crisis, not just a moderate economic slowdown, its board member Makoto Sakurai said, suggesting no additional easing was likely in the near-term.

Sakurai, among the Bank of Japan's (BOJ) nine board members, said the central bank would need to ease if the economy was hit by a severe shock that disrupts its banking system and triggers a recession.

But the BOJ should avoid rushing into action if the hit from slowing global demand is moderate, given the rising cost of prolonged ultra-low interest rates such as the strain they inflict on financial institutions' profits, he said.

"If there's a crisis that could disrupt Japan's financial system ... a bold policy response is necessary," Sakurai said in a speech to business leaders in Kobe, western Japan.

"But if the overseas slowdown driven by trade woes is moderate, and the speed at which it affects Japan's economy is slow, we have room to scrutinise economic indicators in deciding on policy," he said on Wednesday.

The BOJ kept monetary policy steady last month but gave the strongest signal to date that it may cut interest rates in the near future, underscoring its concern that overseas risks could derail a fragile economic recovery.

Many analysts, however, believe the threshold for more rate cuts is high due to the rising side-effects of prolonged easing.

Sakurai said the BOJ must always be prepared to ease policy, as Japan may slip back into deflation if the overseas slowdown lasts longer than expected and deals a severe blow to the export-reliant economy.

"The next half-year is when we need to carefully scrutinise economic developments," Sakurai said, noting the risks that an October sales tax hike could cool consumption and that global growth was unlikely to pick up until around mid-2020.

The best approach for now is to maintain the current stimulus programme and closely monitor how commercial banks cope with prolonged ultra-low rates, he said.

"In guiding monetary policy, there's an increasing need to be mindful of the side-effect of continuing our low-rate policy such as that on Japan's banking system," Sakurai said.

Sakurai is seen by market participants and analysts as belonging to a broad camp on the central bank board that is more concerned about the side-effects of prolonged easing, while other board members see more room for stimulus.

Under a policy dubbed yield curve control (YCC), the BOJ pledges to guide short-term rates at -0.1% and the 10-year bond yield around 0%. While the policy has helped keep corporate borrowing costs low, it has flattened the yield curve and crushed the margin commercial banks earn from lending.

The International Monetary Fund urged the Bank of Japan to consider steps to ease the strains caused by its ultra-loose policy on financial institutions, such as targeting a shorter maturity for its long-term bond yield target.

Japan's economic growth slumped to its weakest in a year in the third quarter as soft global demand knocked exports. Analysts fret that a sales tax hike from October could also weigh on the economy.