Professor Pokes Raw Nerve at BOJ With New Take on Negative Rates

(Bloomberg) — The university professor at the center of fresh debate on the Bank of Japan’s monetary policy said scrapping negative interest rates now could support economic growth and prices.

Since the BOJ’s research institute released Junko Koeda’s study of negative rates earlier this month, speculation has intensified that the central bank is deliberately feeding debate over its policy options in preparation for any future pullback of its stimulus.

The surge of interest even prompted an appearance by Governor Haruhiko Kuroda in parliament, where he defended negative rates and insisted the BOJ would continue to keep short-term rates negative to help achieve Japan’s 2 percent inflation goal.

“Raising the rate now, rather than not doing so, could work toward pushing up economic activity and prices,” Koeda, an associate professor at Waseda University, said in an interview on Nov. 19.

Koeda’s Conclusion

In her report, which looked specifically at circumstances in September 2016, Koeda concluded that ditching the negative rate and tying the BOJ’s next move to 1 percent inflation rather than 2 percent inflation could have supported prices and the economy. She also reasoned that it wouldn’t necessarily have been a tightening move.

She emphasized in the interview that her take on the current situation, unlike September 2016, wasn’t based on a full data analysis.

Koeda, who was taken aback by the attention her work has drawn, said she wasn’t aiming to make any policy proposals.

September 2016 was a huge moment for the central bank, when it switched the main focus of its easing policy to interest rates from buying specific quantities of bonds in its first major move to ensure the sustainability of its stimulus program.

Distorted Market

While the BOJ has halved its bond purchases since then, it had to take further action in July this year amid criticism that its program was distorting the bond market and squeezing the profits of commercial banks.

While Kuroda said in parliament that the BOJ isn’t considering dropping negative rates in the near future, speculation is likely to rumble on.

“While there have been publications in the past concerning the side effects of the BOJ’s monetary easing policy, this is the first publication delving into the basic framework of monetary policy,” Naohiko Baba, chief Japan economist at Goldman Sachs, wrote in recent note.

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