TOKYO : Hiroshi Nakaso, the Bank of Japan’s former deputy governor seen as a top contender to become its next head, has a playbook in mind for when the time comes for the central bank to exit ultra-easy monetary policy.
Under its yield curve control (YCC), the BOJ sets a -0.1 per cent target for short-term interest rates and guides the 10-year bond yield around 0 per cent. It also buys huge amounts of bonds and risky assets as part of efforts to sustainably meet its 2 per cent inflation target.
In a book published in May, Nakaso explains the BOJ will first abandon the 10-year bond yield cap and shift to a policy only targeting short-term interest rates.
The central bank will mop up money from the economy by raising the interest it pays to financial institutions’ excess reserves parked at the BOJ, according to the book.
After lifting short-term rates into positive territory, the BOJ would then shrink its bloated balance sheet “slowly and at a predictable pace, to avoid causing unexpected disruptions in the market,” he wrote.
The BOJ has plenty of lessons it can draw from the U.S. Federal Reserve’s ongoing steady rate hikes and its market impact, Nakaso said in the 736-page book, which is available only in Japanese.
People with knowledge of the BOJ’s thinking say Nakaso’s proposal is roughly in line with the dominant view within the bank on what an exit strategy would look like.
The BOJ’s relentless defence of its 10-year yield cap has caused market distortions. Markets are rife with speculation the BOJ will tweak YCC when the dovish governor Haruhiko Kuroda departs.
A career central banker with experience battling the market fallout from the 2008 collapse of Lehman Brothers, Nakaso is considered by markets as a top contender to succeed Kuroda when his second, five-year term ends in April.
In a seminar last month, Nakaso said central banks must remove emergency support measures once financial crises are over to avoid causing moral hazard in the market.
Earlier in May, he told Reuters former premier Shinzo Abe’s stimulus measures relied too heavily on fiscal spending and ultra-loose monetary policy in reflating growth.
While stressing the need to keep ultra-loose policy for now, Kuroda has recently signalled the chance of phasing out stimulus when achievement of the 2 per cent inflation target comes into sight.
Kuroda also said last month that any future debate on an exit will centre on the pace of increase in short-term rates and adjustments in the bank’s balance sheet.