Concern at the Bank of Japan (BOJ) over the effectiveness of prolonged low interest rates appears to be growing, with one board member indicating that a policy review may be needed, a summary of views from the central bank’s January meeting signalled.
The member said active discussions over policy are taking place in the US and in Europe given continued low growth and feeble inflation that is seen as a Japanification of those economies. Monetary policy in Japan may also warrant review, the member said.
One member said that having low rates for a lengthy period could end up weakening inflation expectations among households and companies if it prompts them to take a more cautious views about the future. It isn’t clear if the same member made the comments as the summary doesn’t specify who said what.
The comments point to a widening spectrum of discussions among policy makers at the bank on the impact of prolonged low rates that goes beyond their implications for private banks.
The summary comes a day after the government nominated pro-easing advocate Seiji Adachi to replace like-minded reflationist Yutaka Harada on the board. While Adachi’s appointment would maintain the balance of enthusiastic stimulus proponents on the board, he has made comments in the past indicating that he isn’t in favour of lowering negative rates further if more easing is required.
The comments show a subtle shift in the main points of discussions among members, from vigilance over heightening risks from overseas economies, back to the side effects of negative rates and how to make its easing program more sustainable.
Given the length of time since the start of the BOJ’s powerful easing, it’s becoming increasingly important to enhance the sustainability of the policy while keeping an eye on the growing side effects, one member said.
A majority of surveyed economists expect the BOJ to stay on hold for a while before it eventually moves to tighten policy as its next move provided markets remain stable.