By Leika Kihara
TOKYO, April 8 (Reuters) – Japan must respect central bank independence to prevent unwelcome rises in bond yields, former IMF chief economist Kenneth Rogoff told Prime Minister Sanae Takaichi at a meeting of the government’s top economic council, minutes of the meeting released on Wednesday showed.
Rogoff, who now teaches at Harvard University, made the remark at the council’s meeting on March 26, where he was invited to offer his views on Takaichi’s economic policies, according to the minutes.
Rogoff said he would not be surprised if long-term Japanese government bond (JGB) yields went up to 3% or even higher in the coming years, given the way governments across the globe were boosting debt-funded spending on areas such as defence, the minutes showed.
Having an institution independent from the government make fiscal projections could help Japan maintain market trust in its finances, he was quoted as saying.
“Central bank independence, however, is even more important,” Rogoff said.
“It’s precisely when markets are worried that you’re doing things to push up interest rates (high deficits) or having to live with higher global interest rates that it can be very problematic if the central bank is perceived as being very subordinate to the government. For that can make long-term interest rates go up even more,” he was quoted as saying.
An advocate of loose fiscal and monetary policy, Takaichi and her economic advisers have repeatedly voiced displeasure over the Bank of Japan’s plan to raise interest rates from still-low levels.
While the BOJ has signalled its readiness to raise rates again as soon as this month, some analysts believe political opposition could prod the central bank to delay such action as the Middle East conflict clouds Japan’s recovery prospects.
LOW RATES WON’T LAST
With a focus on reflating growth, Takaichi’s administration has introduced fuel subsidies and is considering freezing an 8% sales tax on food for two years – moves that would add to Japan’s already huge debt pile.
The government is also considering tweaking Japan’s fiscal goals in a move critics say would water down an existing gauge that sets a deadline for achieving a primary balance surplus.
Investor concern over Japan’s expansionary fiscal policy and mounting inflationary pressures lifted the benchmark 10-year JGB yield to a 27-year high of 2.43% on Thursday.
Olivier Blanchard, professor emeritus at the Massachusetts Institute of Technology who was also invited to speak at the council, pushed back against a temporary tax freeze, saying Japan should instead prioritise structural reforms.
He also warned that while Japan was seeing its debt ratio decrease as interest rates on existing debt remained lower than the growth rate, such a situation was not going to last.
“A lot of debt was issued when interest rates were very low or negative and this is going to go away,” he said, adding that neutral interest rates would be higher globally.
“So, the assumption has to be that at some stage in the future, maybe say five years, we have interest rates equal to growth rates. And then by arithmetic implication, where you need to be in five years is to have a zero primary balance,” he was quoted as saying in the minutes.
(Reporting by Leika Kihara; Editing by Kate Mayberry)
Comments