Bank of Japan
board member Takehiro Sato on Wednesday warned of diminishing returns
and potential drawbacks of maintaining the bank's massive stimulus
program for too long, such as delaying government efforts to fix Japan's
tattered finances.
Steady
progress in restoring Japan's fiscal health is crucial for the success
of the BOJ's quantitative and qualitative easing (QQE) campaign -
including a smooth exit from the huge asset-buying program, the former
market economist said.
"Once market participants have concerns about (Japan's) fiscal discipline, controlling long-term interest rates will become difficult even for the BOJ," Sato said in a speech to business leaders in Kofu, Yamanashi prefecture.
Saddled with the industrialized world's heaviest public debt and having delayed a sales tax hike last year, the government will craft a fiscal plan this month to meet its ambitious target of bringing the primary budget, which excludes interest payments, to a surplus by fiscal 2020.
Premier Shinzo Abe has worried fiscal hawks by stressing that he will prioritize boosting economic growth and tax revenues, rather than spending cuts. Critics say the BOJ is keeping lawmakers complacent about fiscal reform by driving borrowing costs to artificially low levels with its huge bond purchases.
Sato acknowledged that the BOJ's bond buying was affecting the government's fiscal plans and warned of the potential drawbacks of QQE, such as drying up bond market liquidity.
He said the BOJ may face difficulty buying government bonds at its current pace as financial institutions, many of whom need to set aside a certain amount in bonds for collateral, run out of debt paper to sell to the central bank.
At some point, the BOJ may fail to draw enough bids in its bond-buying operations," Sato told a news conference.
"If this happens constantly, it may become difficult to achieve our pledge to increase base money at an annual pace of 80 trillion yen ($650 billion)."
His warning on the potential risks of QQE contradict Governor Haruhiko Kuroda, who has said there are no significant drawbacks that warrant attention.
"Once market participants have concerns about (Japan's) fiscal discipline, controlling long-term interest rates will become difficult even for the BOJ," Sato said in a speech to business leaders in Kofu, Yamanashi prefecture.
Saddled with the industrialized world's heaviest public debt and having delayed a sales tax hike last year, the government will craft a fiscal plan this month to meet its ambitious target of bringing the primary budget, which excludes interest payments, to a surplus by fiscal 2020.
Premier Shinzo Abe has worried fiscal hawks by stressing that he will prioritize boosting economic growth and tax revenues, rather than spending cuts. Critics say the BOJ is keeping lawmakers complacent about fiscal reform by driving borrowing costs to artificially low levels with its huge bond purchases.
Sato acknowledged that the BOJ's bond buying was affecting the government's fiscal plans and warned of the potential drawbacks of QQE, such as drying up bond market liquidity.
He said the BOJ may face difficulty buying government bonds at its current pace as financial institutions, many of whom need to set aside a certain amount in bonds for collateral, run out of debt paper to sell to the central bank.
At some point, the BOJ may fail to draw enough bids in its bond-buying operations," Sato told a news conference.
"If this happens constantly, it may become difficult to achieve our pledge to increase base money at an annual pace of 80 trillion yen ($650 billion)."
His warning on the potential risks of QQE contradict Governor Haruhiko Kuroda, who has said there are no significant drawbacks that warrant attention.
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