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Japan's central bank is willing to finance the government's new stimulus program. That's what Hideo Hayakawa, the former director of the Bank of Japan, said in a recent interview with Bloomberg. The government is expected to introduce new stimulus measures in October to mitigate the impact of the planned VAT increase. By buying government bonds directly, the Bank of Japan can send a signal that the government and the central bank are willing to work together to support the economy, the former central banker said.
The Bank of Japan could buy the new issuance of government bonds once to help the government. As a result, the central bank does not have to announce any changes in its policy. According to Hayakawa, the Bank of Japan still has more than enough room to buy government bonds, as it is still more than half below its target of ¥80 trillion per year.
"Regardless of how you phrase it, at the end of the day, it's very likely that the Bank of Japan will buy up the additional bond issuance."Hayakawa stated. According to the former central banker, the Japanese economy is doing better than expected, despite global growth slowdown due to the trade war and the decline in technology stocks. Still, according to him, it is not wrong for the central bank to administer some extra stimulus to the economy.
"With the expectation that the Federal Reserve will cut interest rates a day after the Bank of Japan meeting, it may not be right to do nothing. For the time being, circumstances allow the Bank of Japan to adjust its future forecasts on its own. There is no need to play their cards now that the waters are a bit calmer."
In recent months, the central bank has bought far fewer government bonds than the maximum quota. That's because the interest rate on 10-year loans hovers around -0.2%. That is the lower limit at which the central bank is allowed to buy the debt securities under the current rules. The Bank of Japan has been buying government bonds and equities on a large scale in recent years to support the economy. As a result, the balance sheet total has risen from ¥114 trillion to ¥566.6 trillion in ten years, of which ¥468 trillion is government bonds.
