By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) -Incoming Bank of Japan (BOJ) Deputy Governor Shinichi Uchida on Tuesday brushed aside the chance of an immediate overhaul of ultra-loose monetary policy, suggesting that any review of its policy framework could take about a year.
Uchida, a career central banker, said the BOJ should not modify its ultra-easy policy just to address the side-effects of prolonged stimulus such as market distortions caused by the bank’s heavy intervention to defend its yield cap.
“The BOJ must maintain monetary easing. It shouldn’t modify easy policy just because there are side-effects. Rather, it must come up with ideas” to mitigate the costs and help sustain stimulus, Uchida told an upper house confirmation hearing.
If the BOJ were to conduct a comprehensive review of its policy framework, it could take one to one-and-a-half years if the experience of U.S. and European counterparts is anything to by, Uchida said.
The remarks follow those of incoming BOJ Governor Kazuo Ueda on Monday suggesting his preference to spend “plenty of time” if the central bank were to conduct a review of its policy framework.
With inflation exceeding its 2% target, markets are rife with speculation the BOJ will overhaul its yield curve control (YCC) policy once Ueda succeeds incumbent Governor Haruhiko Kuroda, whose term ends in April.
BOJ board member Naoki Tamura has openly called for the central bank to conduct a review of its 2% inflation target and its ultra-loose monetary policy, in light of criticism that prolonged low rates were hurting financial institutions’ margins and distorting the shape of the yield curve.
While stressing that it was premature to discuss an exit strategy from ultra-loose monetary policy, Uchida said any exit would involve adjustments in the BOJ’s interest rate targets and the level of its balance sheet.
“In what order and at what timing the BOJ will make these adjustments will depend on economic and financial developments at the time,” Uchida said.
The BOJ can tap its experience conducting ultra-loose policy and dealing with market forces, to ensure it can steer a smooth exit regardless of economic conditions at the time, he said.
Earlier this month, the government named Uchida and Ryozo Himino, former head of Japan’s banking sector watchdog, to become next BOJ deputy governors when the incumbents’ terms end in March.
The BOJ has been forced to ramp up bond buying to defend its 0.5% cap set for the 10-year bond yield under YCC, leading some market players to bet it will tweak or abandon the policy soon.
The nominations need the approval of the upper and lower houses of the Diet, which are effectively done deals as the ruling coalition holds solid majorities in both.
(Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Jacqueline Wong and Sam Holmes)
