TOKYO – The Bank of Japan still has options at its disposal to ease monetary policy further if needed, including boosting purchases of government bonds, exchange-traded funds and real-estate trust funds, a key economic adviser to Prime Minister Shinzo Abe said on Tuesday.
The central bank last week announced a plan to pump $1.4 trillion into the economy to jolt it from protracted deflation, and Governor Haruhiko Kuroda said the bank had taken all available steps deemed necessary to achieve the 2 percent inflation target that is the centerpiece of his policy.
But Abe adviser Koichi Hamada said there was more the BOJ could do if necessary.
"The BOJ can buy whatever amount of ETFs and REITs it can. It can even buy government bonds more forcefully, as if it were to buy the entire amount in markets," Hamada said in an interview with Reuters.
"There are also other various measures, although the BOJ must also be mindful of the drawbacks."
In the wake of the BOJ's move, the yen slipped to a four-year low against the dollar on Tuesday while Tokyo share prices have climbed to a near five-year high <.N225>. The BOJ's bold gamble has also sent bond yields to record lows.
Hamada, professor emeritus of economics at Yale University and one of two official economic advisers to Abe, said current dollar/yen levels are positive for Japan's export-reliant economy and appropriate judging from the country's competitiveness.
"The dollar/yen, at around 100 yen, has returned to levels around the time of the Lehman crisis. It's an appropriate level judging, as an academic, from indicators gauging each country's competitiveness such as real, effective exchange rates," he said.
The BOJ will buy 7.5 trillion yen of long-term government bonds per month, roughly 70 percent of bonds sold in the markets. It combined two bond-buying schemes - its asset-buying and lending program used as a monetary policy tool, and its "rinban" market operation - to buy longer-dated government bonds, including those with durations as long as 40 years.
"It was a watershed event that the BOJ adopted these measures," Hamada said.
Hamada was appointed a special adviser to Abe's cabinet last December after the Liberal Democratic Party was swept to power by a landslide lower house election victory.
Abe has pushed for ambitious expansionary policies with heavy fiscal spending and bold monetary policy, appointing Kuroda to lead the central bank and applying pressure for more drastic monetary easing.
"The BOJ now decided to buy long-term government bonds. That itself is progress," Hamada said. "It's important that the BOJ admitted our view."
Hamada played down the importance of the BOJ achieving its 2 percent inflation goal within the next two years, as Kuroda has vowed.
"I'm of the view that Japan doesn't have to see 2 percent inflation. Just 1 percent inflation is enough, as long as the economy recovers," he said.
"For the economy to recover, you need gradual price rises. It's nonsense to think that the price target must be met at all cost."
The latest inflation data showed that Japan's core consumer prices fell 0.3 percent in February from a year earlier and many analysts say it will be a daunting task to achieve the central bank's price goal.
Hamada also said that delaying by a year the planned first stage of a sales tax hike could be an option as a pre-emptive move to sustain the current positive momentum in the economy.
Japan plans to double the sales tax to 10 percent in two stages, with the first increase set for April 2014. But the government has said it will make a final decision on whether to go ahead after scrutinizing economic conditions this autumn.
"Bottom line, I think the government should be cautious," Hamada said.
He expressed confidence that Kuroda would move boldly enough to keep the economy afloat despite the sales tax hike, but added: "To be safe, however, I think one idea is to delay it by a year."
(Additional reporting by Sumio Ito; Editing by Edmund Klamann)