-->BoJ should look at side-effects of easy credit policy - Mizuno -
Friday, December 3, 2004 10:42:55 AM
http://www.afxpress.com


(Updating with more comments)
TOKYO (AFX) - Atsushi Mizuno, who today joined the Bank of Japan's nine-member policy board, said he believes the central bank should begin to look at the side-effects of its ultra-easy credit policy, and possibly shift its focus from structural problems to cyclical factors. In his first press conference, Mizuno called for the BoJ board to start examining the validity of its quantitative easing monetary policy because he sees early signs of an asset price inflation bubble developing again in Japan as a result of the prolonged zero-rate interest policy

"As the original target of the introduction of the monetary credit policy easing -- that is, the stabilization of the financial system and prevention of a deflationary spiral -- is beginning to be achieved, we probably need to examine whether maintaining this policy is justified," Mizuno said

"For instance, while it hasn't been reflected in prices, the tightening of credit spreads and recent moves in the distressed asset market may be signaling (the recurrence) of an asset price bubble in Japan.""Although the current board members seem to believe the current deflation in Japan may just shift to disinflation, I am looking further ahead," Mizuno elaborated

"And from the viewpoint of asset price stabilization, the prolonged quantitative monetary policy easing could distort asset price development in the future," he said

Mizuno's views are unlikely to have any immediate effect on BoJ policy, as the nine-member policy board has voted unanimously at its past 14 meetings to maintain its so-called quantitative easing policy

Under that policy, the BoJ floods the market with excess liquidity to keep short-term interest rates near zero. That policy, which the BoJ has maintained since March 2001, is aimed at ending Japan's six-year battle with deflation."I understand he (Mizuno) is well-known as a 'hawkish' or bullish economist, whose thinking is close to that of (Bank of Japan governor Toshihiko) Fukui," said Akio Yoshino, senior economist at Societe Generale Asset Management

"Nonetheless, I doubt if his appointment will have any immediate impact on the Bank of Japan's ultra-easy credit policy as he is just one of nine board members." BoJ Governor Fukui, who heads the board, has repeatedly vowed that the central bank will not abandon its super-loose credit stance until the year-on-year change in the monthly core CPI, which strips out volatile food prices, remains at or above zero for a prolonged period

The central bank recently fueled speculation that a change might finally be on the horizon by forecasting a slight rise in the core CPI rate in the year to March 2006

Fukui has sought to dampen such speculation by reminding the market that two other conditions must also exist before credit will be tightened. The BoJ chief has declared there must be no fear of deflation re-emerging, and the economy must be growing steadily

Mizuno was bound to add a new slant to BoJ policy deliberations. Mizuno, 45, is the first person ever to join the BoJ policy board directly from a foreign securities house. He had just joined Credit Suisse First Boston Securities (CSFB) in mid-September as co-head of research and chief fixed-income strategist

Prior to that, Mizuno worked more than six years for Deutsche Securities, first as chief fixed-income strategist and chief economist for Deutsche Morgan Grenfell, before promotion in January 2004 to vice-chairman, global markets Japan for Deutsche Securities

Mizuno, who holds a PhD in economics from the City University of New York, said he believed the Bank of Japan should consider the option of shifting its policy focus more to cyclical factors from structural issues, saying that"as economic conditions change, the way of thinking should also change.""There may already be a need to examine a framework which focuses on cyclical factors, shifting from a framework which aimed at dealing with structural problems," Mizuno said

However, Mizuno declined to estimate when the current quantitative monetary easing policy should be lifted, saying simply that"when we make any change to the current policy, we should take time." Mizuno said he believes that the Japanese economy has effectively overcome its most severe structural problems, especially in the corporate sector, and is now on track toward sustained growth

"In the corporate sector, the prolonged balance sheet adjustment is already over and companies are now boosting profitability," he said

"Therefore, even if corporate capital spending dips temporarily, it will start recovering sooner or later." Results released today of a Ministry of Finance survey found parent-level pretax profits of non-financial Japanese companies in the July-September quarter rose 37.8 pct from a year earlier, up from an increase of 34.3 pct the previous three months and the ninth straight quarterly increase

Even more encouraging given recent concern that such spending was flagging, the survey found corporate investment spending rose 14.4 pct, even more than the 10.7 pct increase in the April-June period and the sixth straight quarterly increase