TOKYO (Reuters) – The Japan government’s nominee to be the next central bank governor outlined more forceful policy prescriptions on Monday to finally defeat deflation, saying he would not set any limits on the amount of cash the Bank of Japan pumps into the economy.
Underlining expectations he would be an aggressive governor, Haruhiko Kuroda told lawmakers the BOJ’s current policies were not powerful enough to boost inflation to 2 percent, a target he said the central bank should strive to achieve in two years.
Kuroda suggested the most natural way to ramp up the central bank’s stimulus for the economy would be through huge purchases of longer-dated government bonds. The BOJ should also consider kicking off its open-ended asset purchases early, rather than waiting until the scheduled start date of 2014.
“It would be natural for the BOJ to buy longer-dated government bonds in huge amounts,’’ Kuroda said in a confirmation hearing in the lower house of parliament. “But the central bank also needs to scrutinize market developments at the time, as well as the potential drawbacks.’’
Prime Minister Shinzo Abe nominated Kuroda, president of the Asian Development Bank, to be the new governor in a push for bolder central bank efforts to end nearly two decades of debilitating deflation and revive the fortunes of an economy stuck in its fourth recession since 2000.
His nomination is expected to be approved by parliament because opposition parties, whose support would be needed in the upper house, have indicated they would back him.
The prospect of BOJ buying longer-dated bonds prompted a market rally, led by the longer end. Yields on 20-year bonds dropped to a seven-month low of 1.550 percent.
Yields on 5-year debt hit a record low of 0.110 percent.
Japan’s former top currency diplomat, Kuroda, 68, would replace incumbent Masaaki Shirakawa, 63, who is due to leave office on March 19 along with his two deputy governors.
Under Shirakawa, the BOJ has agreed to buy assets or make loans totalling 101 trillion yen by the end of this year, part of which includes buying government bonds with a maturity of up to three years. It said in January it would switch to open-ended asset buying from 2014 to achieve the 2 percent inflation target.
Abe’s demands for bolder action has already pushed the yen to a three-year low and the stock market to a four-year high as investors anticipated much looser policies. Sentiment in the government bond market reached a seven month high, a Thomson Reuters poll showed on Monday.
“Market expectations are high and it will be hard for the BOJ to do something to surpass such expectations,’’ said Koichi Haji, chief economist at NLI Research Institute.