Bank of Japan Should Quit While It’s Ahead, Says Hayakawa

By Chikako Mogi and Masahiro Hidaka

Photographer: Tomohiro Ohsumi/Bloomberg News.

Hideo Hayakawa, Bank of Japan's former chief economist.

The Bank of Japan should quit while it’s ahead. That’s the advice of the central bank’s former chief economist, Hideo Hayakawa.
The BOJ should start paring its unprecedented easing soon or risk hurting people, Hayakawa said in an interview. Pushing inflation to a 2 percent target in a short period will raise living costs without boosting employment or growth, he said.
“It’s important to quit while you’re ahead,” said Hayakawa, who was an executive director at the BOJ until March 2013. “Basically, drop the two-year reference, keep the 2 percent target and taper slowly.”
The remarks underscore the risks Governor Haruhiko Kuroda is taking to reflate the world’s third-biggest economy with a stimulus program he began in
April last year. While the BOJ is still winning its “gamble” with its stimulus, it shouldn’t push its luck, Hayakawa said.
“The secret to success is declare victory while you’re winning,” he said.
With prices rising by about 1 percent and a labor shortage intensifying, the central bank will eventually achieve the inflation goal and shouldn’t rush, according to Hayakawa.
Masayoshi Amamiya, BOJ’s executive director in charge of monetary affairs, said today in a parliamentary committee that the central bank’s easing helps invigorate the economy.

Photographer: Junko Kimura-Matsumoto/Bloomberg

Bank of Japan Governor Haruhiko Kuroda is taking to reflate the world’s third-biggest... Read More

With the BOJ buying assets at a record pace, it could face huge losses should interest rates start to rise, according to Hayakawa. The central bank buys about 7 trillion yen of Japanese government bonds a month.

Yen Weakness

Growing public criticism of the yen’s recent weakness means the BOJ can’t stick to its current plan to reach 2 percent inflation, he said.
“The short cut to achieving the 2 percent target is through a weak yen but that goes against public sentiment,” Hayakawa said. “It’s not good to go too far and get wounded later.”
The yen reached 110.09 per dollar on Oct. 1, the weakest since August 2008. It traded at 107.25 as of 2:06 p.m. in Tokyo.
Japan’s shrinking population is creating labor shortages, prompting companies to boost wages to attract workers. Rising labor costs indicate the economy’s productivity is declining, with the potential growth rate now close to zero percent, Hayakawa said.
The BOJ puts the potential growth rate around 0.5 percent and Hayakawa said he’ll be watching to see whether the bank cuts that estimate when it gives its outlook report on Oct. 31.

Growth Forecast

The bank will probably slash its forecast for the economy’s expansion for the current fiscal year through March while maintaining its inflation projection, he said.
The rising labor costs that companies will need to pass on to consumers will keep inflation above 1 percent, even as price gains slow due to recent declines in oil and smartphone prices, he said.
The BOJ could declare its victory against deflation by the end of the year, when consumer prices gains will begin to pick up again and the economy will show signs of shaking off recent weakness, he said.
The BOJ should then slowly begin to taper its monetary stimulus, Hayakawa said.