Bank of Japan contenders and the Elephant in the Room

Bank of Japan contenders and the Elephant in the Room

Kanako Mita, Sawako Utsumi, and Lee Jay Walker

Modern Tokyo Times

The Bank of Japan (BOJ) will witness a new Governor when the incumbent leader Haruhiko Kuroda steps down next year. Masayoshi Amamiya and Hiroshi Nakaso are among the favorites to replace Kuroda.

Amamiya and Nakaso differ in their response to the continuing economic malaise of Japan. Hence, Amamiya is more in line with Kuroda concerning recent monetary policy.

A former official at the BOJ, Nobuyasu Atago, uttered, “Nakaso belongs to a camp that believes central banks should not intervene too deeply in markets, while Amamiya appears more flexible… The key difference lies in their views on how far central banks should stretch the boundaries of monetary policy.”

Hence, if market liquidity is strained for financial companies related to ultra-low rates to support economic growth, Amamiya believes it is worth paying. Of course, Amamiya and Nakaso – and other contenders – all fully understand the need to keep rates ultra-low because of the horrendous holdings of debt.

Reuters reports, “Nakaso laid out in detail how the BOJ could end ultra-loose policy: Raise the interest paid on financial institutions’ excess reserves, stop reinvesting money from bonds when they mature and gradually trim the bank’s balance sheet to levels where market functions recuperate.”

Amamiya isn’t a complete Kuroda dove in the making. For example, he warned several years ago that the yield cap policy of the BOJ may embed a negative endless bankroll that entices more government debt. If this happens, Amamiya warns that this will make the ending of the ultra-loose Kuroda policy extremely difficult.

Nakaso fears that investors are over-relying on central banks supporting the financial system after mega monetary support during the coronavirus (Covid-19) crisis.

He says, “This moral hazard must be removed once the crisis is over, though this is easier said than done because it’s a contradictory issue… Crisis management is like creating … artificial moral hazard… It shouldn’t stay forever.”

Irrespective if the next leader of the BOJ is Amamiya or Nakaso – or another candidate – all must overcome the brittle Japanese economy blighted by a mountain of public debt. Thus, how to break free from ultra-low rates to keep public debt repayments manageable is the “elephant in the room.”

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