BOJ policymaker sees lesson in Fed's policy exit challenge

By Leika Kihara

KUSHIRO, Japan (Reuters) - The Bank of Japan should not increase its stimulus further and needs to learn from the experience of the U.S. Federal Reserve this week in preparing for the huge challenge of exiting its unconventional policy, a central bank board member said.

The central bank's stimulus could in fact harm the economy if it was maintained for too long, Takahide Kiuchi said on Thursday, and so it should not take new steps except in response to severe shocks to activity or the financial system.

"Unconventional monetary policy tends to create imbalances across borders. That's why normalising monetary policy is very difficult and could cause market disruptions," Kiuchi, a former private-sector economist, told a news conference.

"The Fed was only trying to scale back stimulus, not tighten policy. Still markets get ahead of themselves and long-term rates shot up more than expected," said Kiuchi, the first BOJ policymaker to publicly comment on the Fed's decision.

The Fed defied investor expectations on Wednesday by not starting to wind back its massive monetary stimulus, saying it wanted more evidence of solid economic growth.

The imbalance created by the Fed's stimulus has made markets volatile and excessively sensitive to the message the central bank sends out on the policy outlook, Kiuchi said.

So when the Fed indicated a tapering was possible earlier this year, the consequent rise in U.S. Treasury yields and slowdown in emerging markets as investors withdrew their capital instead forced a delay in the start, he added.

"As the Fed's example showed, there are strong demerits to huge asset purchases by the central bank. We therefore should consider easing only if the benefits of doing so outweigh such demerits," said Kiuchi after speaking to business leaders in Kushiro in the northernmost prefecture of Hokkaido.

He added there were no immediate implications for the BOJ from the Fed's decision, as each central bank decided on the most appropriate policy for its economy.


The BOJ launched an intense burst of monetary stimulus in April, pledging to double the base money via asset purchases to achieve its 2 percent inflation target in roughly two years.

Kiuchi, considered a pessimist among BOJ board members, reiterated his view that two years was not enough given slow wage growth and Japan's long experience of grinding deflation.

Previously, the BOJ board has rejected his proposals to make the inflation target a medium- to long-term goal, and to set a deadline for the current stimulus.

Consumer prices rose 0.7 percent in July from a year earlier, the fastest in five years, though they remain distant from the central bank's price target.

In his speech, Kiuchi said risks to Japan's recovery are growing because advanced economies may not be able to grow fast enough to pick up the slack from a slowdown in emerging markets.

"Personally, I see risks to Japan's economy tilted somewhat toward the downside," Kiuchi said, offering a gloomy view on the outlook for exports and private consumption.

Despite that outlook, he said there was no need for the BOJ to introduce extra stimulus to offset the impact of an expected sales tax increase next year.

"We've abandoned the approach of fine-tuning our policy just because the economy is temporarily in bad shape. It would take a significant, big shock for us to consider easing."

Kiuchi's tone contrasted with that of BOJ Governor Haruhiko Kuroda, who in a separate appearance said the central bank's stimulus was having a positive effect on markets and the economy.

"I expect the gradual economic recovery to continue and for upward pressure on prices to increase due to gains in corporate profits and wages," Kuroda said in a speech in Tokyo.

Data earlier in the day showed that while confidence among manufacturers slipped in September from a three-year high, exports posted their strongest growth in three years in August.

Japan's economy expanded for a third straight quarter in April-June, outpacing many of its G7 counterparts, as the pro-growth policies of Prime Minister Shinzo Abe boosted sentiment and personal consumption.

(Additional reporting by Stanley White; Editing by John Mair)