Published March 05, 2013
TOKYO – The Japanese government's nominees for the Bank of Japan's two deputy governors offered contrasting policy views on Tuesday, as one described a bold path to meet an inflation target and the other often declined to commit to unconventional policy steps.
The differing views could raise questions as to how aggressive the BOJ will be as Prime Minister Shinzo Abe pushes for an overhaul of the central bank's management to encourage bolder monetary measures to end years of deflation.
Nominee Kikuo Iwata, an academic whose research focuses on inflation targeting, suggested the BOJ should buy longer-dated government bonds to reach its 2 percent inflation target in two years or sooner.
He said the central bank should target bonds with a maturity of five years or longer and was willing for such a mandate to be put into law. The BOJ currently buys bonds of up to three years maturity.
In contrast, Hiroshi Nakaso, a career BOJ official, said "it is hard" to say if the central bank can meet its inflation target in two years and there are limits to what monetary policy can do to end nearly 20 years of deflation.
Iwata's comments "show his commitment and strong determination to achieve the price target," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
"Nakaso is trying to take into consideration what the government expects, but he seems to be rather cautious in comparison," he said.
Yamamoto said the key is whether Nakaso and other members of the board will follow the more aggressive prescriptions of Haruhiko Kuroda, the nominee for central bank governor, and Iwata.
Iwata and Nakaso were speaking in confirmation hearings in Japan's lower house.
On Monday, Kuroda said during his confirmation hearing that the BOJ should strive to reach its 2 percent inflation target in two years and the most natural way to ramp up stimulus would be to buy longer-dated government bonds.
The current BOJ governor will leave office on March 19, along with his two deputy governors, at the end of their terms.
Iwata, 70, a professor at Tokyo's Gakushuin University, stressed the BOJ could foster inflation expectations by lowering longer-term interest rates because that could cause the yen to weaken and lead households and companies to reduce bank savings and boost investments.
The shift in savings would spur consumption and capital expenditure, helping end deflation, he said.
"In Japan's case, deflation has been going on for so long now, that we should aim to achieve 2 percent inflation within 2 years, if not sooner," Iwata said.
"The credibility of a central bank's inflation target is very important. It is also important to influence longer-term interest rates."
Foreign bond purchases - one of the most radical ideas for beating deflation - would be a policy option only if other initiatives failed, Iwata said.
The 2 percent inflation target could be reflected in laws governing the BOJ to give legal backing to the goal, he said. However, Iwata steered clear of directly suggesting the BOJ law should be changed to reduce the central bank's independence, a threat Abe has alluded to in recent months.
Abe's ruling coalition has a majority in the lower house, so his nominees are likely to be approved by that chamber. But he lacks an upper house majority so will need opposition support.
The Democratic Party of Japan, the largest opposition party, could vote against Iwata on concern his push for legal revisions to the BOJ's mandate could reduce the central bank's independence.
"I have reservations about making Iwata part of the BOJ's leadership team because of his views on legal revisions, so I will recommend that we do not support him," Keisuke Tsumura, a Democrat lawmaker who questioned Iwata and Nakaso, told reporters.
Nakaso, 59, refrained from offering a time frame for meeting the 2 percent inflation target, other than saying he would try to reach it as soon as possible.
He also expressed doubt about scrapping interest paid on excess reserves that commercial banks park with the BOJ, which some policymakers have said would encourage those banks to lend the money instead, saying the functioning of the money market should be preserved.
"We have promised to achieve 2 percent, making it clear in our joint statement to meet the target as early as possible. This is our pledge, so we'll do the utmost to achieve it," Nakaso said.
(Editing by Neil Fullick)