BOJ deputy governor warns against pricking bubbles with monetary tightening
Bank of Japan Deputy Governor Masazumi Wakatabe said on Thursday trying to prick asset-inflated bubbles with tighter monetary policy could tip an economy into a serious recession.
Instead of seeking to pre-empt asset bubbles, central banks should focus on taking quick and sufficient steps to reflate growth in the wake of a financial crisis, he said.
The remarks suggest that Wakatabe, a vocal advocate of aggressive monetary easing, will push back against any attempt to whittle down monetary stimulus by those in the BOJ’s board worried about the rising cost of prolonged easing.
“Although we should not ignore asset price fluctuations completely, taking strong measures to burst the bubble could push the economy into a serious recession,” Wakatabe said in a speech at a seminar.
What is more important than pre-empting a bubble is for policymakers to deploy stimulus in the event of a financial crisis so the economy does not slide into deflation, he said.
“As downward pressure is exerted on the economy in the wake of a crisis, it will be necessary to respond with vigorous expansionary macro-economic policies,” said Wakatabe, one of the central bank’s two deputy governors.
Monitoring excessive risk-taking behavior of financial institutions and assessing risks in the banking system would also be useful to prevent a recurrence of financial crises, Wakatabe added.
Under its yield curve control policy, the BOJ now guides short-term interest rates at minus 0.1 percent and long-term rates around zero percent in a bid to accelerate inflation to its 2 percent target.
Subdued inflation has forced the BOJ to maintain its massive stimulus program, despite the rising cost of prolonged easing, such as the hit to financial institutions’ profits from years of near-zero rates.
The BOJ’s nine-member board is split between those who see room to ramp up stimulus to accelerate inflation, and those increasingly worried about the demerits of ultra-easy policy.
Mindful of growing concerns over the cost of easy policy, the BOJ in July took measures to make its stimulus program more sustainable, including allowing bond yields to move more flexibly around its zero percent target.