GIFU, Japan (Reuters) - Any losses the Bank of Japan may incur when it eventually begins to tighten monetary policy will be temporary and would not be a serious problem for the economy, board member Yutaka Harada said on Thursday, seeking to address concerns of some market players.
When the BOJ does tighten policy, it will sell its bond holdings and raise the interest it pays on the excess reserves to mop up liquidity from markets, Harada said.
“It is of course possible that the BOJ may register losses because it will receive low interest rates while paying high interest rates,” Harada said.
But government bond yields would be higher when inflation is accelerating enough for the BOJ to withdraw stimulus, he told business leaders in Gifu, central Japan.
“The BOJ will always make a profit in the long run as it can buy high-yielding government bonds using cash and current account deposits that carry almost no cost,” he said.
“Thus, the BOJ will not make potentially dangerous losses in the long run.”
Harada, among the most vocal advocates of heavy money printing in the nine-member board, also said the BOJ must maintain a loose pledge to keep buying bonds so the balance of its holdings rise at 80 trillion yen ($721 billion) per year.
“Maintaining the guidance is important as it instills confidence among markets” that the BOJ will keep buying bonds heavily when a negative shock hits the economy, he said.
After three years of heavy asset buying failed to drive up inflation, the BOJ revamped its policy framework last year to one controlling the yield curve from that targeting the pace of money printing.
Under the framework, the BOJ guides short-term rates at minus 0.1 percent and 10-year bond yields around zero percent.
It also maintains a pledge to increase its bond holdings at an annual pace of 80 trillion yen. Some analysts believe the BOJ will soon modify or abandon the pledge as the pace of bond buying has recently slowed to around 60 trillion yen.
“The BOJ’s recent purchases are roughly in line with its guidance,” Harada later told a news conference, shrugging off the view the slowdown in the BOJ’s bond buying is inconsistent with its bond-buying pledge.
“For the time being, maintaining our current stimulus program would be sufficient in achieving our inflation target,” he added.
The BOJ’s balance sheet swelled after the adoption in 2013 of its “quantitative and qualitative easing” (QQE) program that aimed to accelerate inflation to 2 percent through huge purchases of government bonds and private assets.
The central bank added negative interest rates to QQE in January 2016 and revamped its policy framework in September to one that aims to control the yield curve.
On the prospects for prices, Harada said he expects inflation to accelerate as the jobless rate nears 2 percent.
Inflation is now barely picking up due to weak private consumption and is nowhere near the BOJ’s target of 2 percent.
“Japan’s jobless rate has already fallen to 2.8 percent. If this trend continues and the jobless rate falls further, there’s no doubt prices will rise,” he said.
A former academic, Harada has voted with the majority of the board since joining the BOJ in 2015.
Growing signs of life in Japan’s economy have presented the BOJ with a fresh communications challenge, pushing it to be clearer with markets on how it might scale back its stimulus - even though such action remains a long way off.
The central bank saw interest payments on its huge bond holdings decline for the first time in five years in the fiscal year that ended in March, a sign that its ultra-loose monetary policy was taking a toll on its financial health.
Reporting by Leika Kihara; Editing by Chang-Ran Kim and Kim Coghill