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Bank of Japan's Sato warns of diminishing returns from monetary easing program

Bank of Japan board member Takehiro Sato speaks during an interview with Reuters at the central bank in Tokyo September 26, 2012. REUTERS/Yuriko Nakao

By Leika Kihara

KOFU, Japan (Reuters) - Bank of Japan board member Takehiro Sato on Wednesday warned of diminishing returns and potential drawbacks of maintaining the bank's massive stimulus program for too long, such as delaying government efforts to fix Japan's tattered finances.

Steady progress in restoring Japan's fiscal health is crucial for the success of the BOJ's quantitative and qualitative easing (QQE) campaign - including a smooth exit from the huge asset-buying program, the former market economist said.

"Once market participants have concerns about (Japan's) fiscal discipline, controlling long-term interest rates will become difficult even for the BOJ," Sato said in a speech to business leaders in Kofu, Yamanashi prefecture.

Saddled with the industrialized world's heaviest public debt and having delayed a sales tax hike last year, the government will craft a fiscal plan this month to meet its ambitious target of bringing the primary budget, which excludes interest payments, to a surplus by fiscal 2020.

Premier Shinzo Abe has worried fiscal hawks by stressing that he will prioritize boosting economic growth and tax revenues, rather than spending cuts. Critics say the BOJ is keeping lawmakers complacent about fiscal reform by driving borrowing costs to artificially low levels with its huge bond purchases.

Sato acknowledged that the BOJ's bond buying was affecting the government's fiscal plans and warned of the potential drawbacks of QQE, such as drying up bond market liquidity.

He said the BOJ may face difficulty buying government bonds at its current pace as financial institutions, many of whom need to set aside a certain amount in bonds for collateral, run out of debt paper to sell to the central bank.

"At some point, the BOJ may fail to draw enough bids in its bond-buying operations," Sato told a news conference.

"If this happens constantly, it may become difficult to achieve our pledge to increase base money at an annual pace of 80 trillion yen ($650 billion)."

His warning on the potential risks of QQE contradict Governor Haruhiko Kuroda, who has said there are no significant drawbacks that warrant attention.


Sato also countered Kuroda's view that QQE was still pushing down hard on bond yields, pointing to the fact that long-term interest rates have bounced back to levels before the monetary expansion of October last year.

"It appears to me that the degree of difficulty in implementing QQE is rising," as its effect in pushing down nominal interest rates has been diminishing, he said.

Sato was among those who voted against the BOJ's decision last October to expand QQE to prevent slumping oil prices, and a subsequent slowdown in inflation, from delaying an end to deflation.

While warning of the diminishing returns of QQE, Sato brushed aside the possibility of reverting to a policy targetting interest rates and cutting the 0.1 percent in interest the BOJ pays to excess reserves parked with it.

"Tweaking the interest won't mesh with our balance sheet target. At present, that's not in our plan," he said.

Some market players speculate the BOJ may cut or abandon the 0.1 percent interest in the future to push down yields and weaken the yen.

($1 = 123.0500 yen)

(Reporting by Leika Kihara; Editing by Chang-Ran Kim & Shri Navaratnam)