Tuesday , May 18 2021

BOJ's Kuroda now excludes interest rate, complaining of structural damage to banks



Japan's Governor Haruhiko Kuroda has dismissed the chances for a short-term increase in interest rates, claiming that now it would only heighten pressures on financial institutions by threatening to kick off economic recovery in the country. NAGOYA, Japan (Reuters)

Governor Haruhiko Kuroda attended a press conference at the BOJ headquarters in Tokyo, Japan on October 31, 2018. REUTERS / Issei Kato

While Kuroda said BOJ would be more aware of the rising costs of the extended incentive, he now saw "no reason" to follow the steps of his US counterparts in normalizing inflation policy that is still far from their 2 percent target.

Kuroda acknowledged that Japanese regional banks might see their business environment even worse five to ten years, since sales assets should not be sold to compensate for the benefits of central loans.

However, their situation had less to do with BOJ's policy than structural problems such as population cuts and lack of funding demand, Kuroda said.

"These long-term issues require attention, but for now, raising rates and increasing yield curves could worsen the economy and have an undesirable impact on financial institutions," Kuroda said at a meeting after meeting with business leaders Monday in Nagoya, central Japan.

"Problems (regional banks) face are structured, so the measures they take must be structured," with mergers and integration between the steps they could adopt, "he said.

The remarks suggest that the central bank will now be excluded from raising rates, and will only take less steps in its program to address the growing cost of relief.

The rising price of long-lasting mitigation was at the center of the debate in September, with one police warning that there is a limit on how long the incentive could be, show a minute published on Monday.

"One member said there is room for the future to make a flexible BOJ policy framework," if the economy continues to expand, they show a minute.

Kuroda said the key would be to encourage BOJ's program to be more sustainable in order to stimulate the economy without destabilizing the banking system.

"Unlike the past, Japan is no longer in a situation where it is a decisive, big policy needed to overcome deflation," he told the Nagoya business leaders, rejecting the opportunity to implement another major incentive program, even if the economy worsens.

"It is necessary to persistently pursue with strong monetary relief while in positive ways we observe the positive effects and side effects".

FLEXIBLE INFLATION TARGET?

Reduced inflation forced BOJ to maintain its radical incentive program, even though low-year rates hurt the profits of financial institutions and dampened the liquidity of the bond market.

The central bank took steps in July to make the policy more viable, such as allowing bond yields to move more flexibly around its zero percent. But measures have done little to alleviate the pain of financial institutions.

With the economy in good form, some legislators say the BOJ should not insist on achieving 2 percent of inflation and start thinking about ways of normalizing policies.

At a meeting with Kurodo Ado Yamamoto, head of business lobby in Nagoya, said the central bank should begin setting up a strategy to end the crisis situation policy.

Kuroda declined to disclose the exit strategy, saying it could be counterproductive with inflation only half the level of BOJ's goal.

But he said he did not expect ultra-easy policies to last for years, adding that the central bank did not insist on achieving the price target at all costs.

"It is true that there is room for flexibility over our price list," Kuroda said.

"We do not intend to reach the target spot for the price all the time."

Additional reporting by Stanley White in Tokyo; Editing Sam Holmes & Shri Navaratnam

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