Bank of Japan may not ease policy further for now

The Bank of Japan is unlikely to ease policy further for the moment as it gauges the impact of its market-roiling move to a negative interest rate, a key economic adviser to Prime Minister Shinzo Abe said on Monday.

Koichi Hamada, special adviser to the Cabinet, told Reuters in an interview that there were also external factors in flux that would probably stay the central bank's hand at a policy meeting that will conclude on Tuesday.

“I think the BOJ wouldn't take further action right now,” Hamada said. “Probably it will be a wise decision.”

Although policymakers are concerned about headwinds to Japan's fragile recovery, the BOJ is expected to hold off cutting interest rates further for now, sources said last week, as the central bank scrambles to soothe market jitters caused when it drove a policy rate below zero in January for the first time.

The decision, meant to spur lending and nudge more of Japan's massive cash piles into investment or riskier investments, instead prompted a sharp rise in the yen, steep falls in shares and caused many individuals to hoard cash.

“The BOJ's negative-rate policy ended up fanning further anxiety in financial markets, which lessened the impact in terms of weakening the yen,” said Hamada, an emeritus professor of economics at Yale.

He noted that the policy — imposing a 0.1 percent charge on some of the excess reserves financial institutions park with the BOJ — has had the intended effect of pushing down market interest rates, including on housing loans.

But, he said, “I wish the yen would fall a little bit” as a result of the BOJ's easing. At the same time, he said, “I wouldn't say the yen is too strong at the moment,” trading around 114 to the dollar.

The Japanese currency, often considered a haven from risk by global investors, hit a 15-month high of 110.99 to the dollar in February when global worries deepened. This hurts Japan's export competitiveness and complicates the BOJ's efforts to end deflation.

Given fragile market sentiment, Hamada expressed opposition to Abe's plan to raise the national sales tax for a second time in April 2017.

“Ramming through the sales-tax hike will carry significant risks,” he said. “With anxiety drifting in financial markets and share prices on the decline, I think any benefits that the sales-tax hike would bring would be overshadowed by the risks.”

Abe raised the levy to 8 per cent from 5 per cent in April 2014, as agreed under the previous government to curb Japan's massive public debt. But the move sent the world's third-biggest economy into deep recession. He postponed the planned second increase, to 10 percent, which was to have occurred last October.

The premier this month suggested the possibility of another delay, and his government has begun informally discussing another postponement, sources say.

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