Architect of Bank of Japan's 'bazooka' stimulus calls for fiscal firepower to beat deflation

[TOKYO] With interest rates already ultra-low, Japan must switch to bolder fiscal spending to pull itself out of economic stagnation, said Kikuo Iwata, the central bank's former deputy governor and architect of its "bazooka"monetary stimulus.

As a vocal advocate of aggressive monetary easing, Iwata provided the academic backbone of Bank of Japan Governor Haruhiko Kuroda's massive asset-buying scheme deployed in 2013 that aimed to accelerate inflation to 2 per cent in roughly two years.

Mr Iwata, who left the BOJ in 2018, now believes monetary policy should take a backseat as slashing long-term interest rates from already low levels would cripple regional lenders and risks destabilising Japan's banking system.

"It would be difficult for the BOJ to cut rates further due to concern over the impact on Japan's financial system," said Mr Iwata, who joined the BOJ board with Mr Kuroda back in 2013.

"There is not much the BOJ can do beyond containing any spike in interest rates. Fiscal policy should take the front seat," he told Reuters in an interview on Tuesday.

A well-known academic on economic policy, Mr Iwata retains influence among reflationist-minded members of the BOJ board.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

After Mr Kuroda's "bazooka" asset-buying programme failed to fire up inflation, the BOJ reverted to yield curve control in 2016 under which it caps long-term interest rates around zero.

Mr Iwata's comments highlight the dilemma the BOJ faces in seeking to underpin a pandemic-hit economy with a dwinding toolkit. The BOJ has also come under fire for hurting bank margins with years of ultra-low rates.

Core consumer prices fell 1.0 per cent in December to mark the biggest annual decline in a decade in a sign of intensifying deflationary pressure.

While Japan has rolled out combined fiscal stimulus of US$3 trillion yen to cushion the blow from Covid-19, Mr Iwata called for even bigger spending focused on compensation to those in need of government support.

"The BOJ can maintain or strengthen yield curve control to keep interest rates low, while the government boosts spending or cuts tax," he said.

"The only mechanism left for Japan to see inflation accelerate to 2 per cent is aggressive fiscal spending."

REUTERS