BOJ putting independence at risk with quasi-fiscal steps, says ex-central bank policymaker

FILE PHOTO: A man wearing a protective mask walks past the headquarters of the Bank of Japan in Tokyo
FILE PHOTO: A man wearing a protective mask walks past the headquarters of the Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon

May 25, 2021

By Leika Kihara

TOKYO (Reuters) – A dearth of conventional monetary tools is pushing the Bank of Japan closer to the realm of fiscal policy and could threaten its independence from political meddling, said former central bank board member Miyako Suda.

As an academic, Suda was involved in crafting a law that gave the BOJ independence from the government and clarified its mandate as achieving price stability.

The law, which took effect in 1998, gave the central bank jurisdiction over a wide range of tools to affect the economy such as cutting interest rates or buying government bonds.

But it requires the BOJ to get consent from the government on steps traditionally considered beyond its remit, such as buying risky assets like exchange-traded funds (ETF).

“One thing that worries me is an increase in BOJ policies that need government consent, such as buying ETFs. Monetary policy is morphing into something that cannot be conducted solely through normal BOJ operations,” Suda said.

“The BOJ’s tools are getting more involved in income distribution, which is the realm of fiscal policy,” she told Reuters in an interview on Monday. “This could put the central bank’s independence on the line.”

Aside from keeping interest rates ultra-low, the BOJ buys huge sums of government bonds and risky assets like ETFs to revive growth and fire up inflation to its 2% target.

As part of efforts to cushion the blow from COVID-19, the BOJ also created a scheme that pays interest to banks that boost government-guaranteed loans to cash-strapped small firms.

“Responding to the crisis is important. But the BOJ may find it hard to decide on its own when to end crisis-mode steps if they’re tied too closely to those of the government,” Suda said.

BOJ Governor Haruhiko Kuroda has said the central bank was undertaking unconventional steps and keeping borrowing costs low solely for the purpose of hitting its 2% inflation target, not to support government finances.

The BOJ’s independence, however, would be tested when the economy improves and inflation begins to tick up, Suda added.

“In crisis times like now, it’s fine for the BOJ to walk side by side with the government,” Suda said. “But when they need to part ways, the BOJ must be ready to do so or else we’ll enter a world of fiscal dominance.”

Suda served as BOJ board member for a decade until 2011, and was involved in the bank’s decision to begin buying ETFs as part of an asset-buying programme put in place in 2010.

(Reporting by Leika Kihara, additional reporting by Kentaro Sugiyama; Editing by Stephen Coates)