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Ex-MOF Nakao Advises BOJ to Exercise Caution on Monetary Policy Shifts

The Bank of Japan (BOJ) should remain cautious about changing its unconventional monetary policy in light of financial market uncertainty stemming from problems in Western banks, according to former top financial diplomat Takehiko Nakao.

Takehiko Nakao, former vice finance minister for international affairs and former president of Asian Development Bank
Takehiko Nakao, former vice finance minister for international affairs and former president of Asian Development Bank

Speculation Over BOJ's Yield Curve Control Policy

Speculation has arisen that the BOJ may abandon its yield curve control policy when new Governor Kazuo Ueda succeeds Haruhiko Kuroda, whose term concludes on April 8.

Impact of U.S. Bank Failures and Credit Suisse Buyout

Recent U.S. bank failures and UBS's acquisition of Credit Suisse last month have driven financial market risk aversion.

Monitoring Market Developments and Credit Anxiety

Nakao emphasizes that the BOJ must carefully monitor market developments, although he believes that credit anxiety is unlikely to escalate into a situation similar to the 2008/09 global financial crisis.

The Need for Fiscal and Monetary Policy Normalization

According to Nakao, Japan should gradually adjust towards normalizing fiscal and monetary policies as financial markets stabilize, as prolonged stimulus could hinder necessary corporate restructuring and job turnover.

BOJ's Delicate Balance in Adjusting Monetary Policy

Nakao, former vice finance minister for international affairs, highlights the need for the BOJ to tread carefully when reconsidering and adjusting monetary policy amid new financial market concerns.

The Limits of Unconventional Monetary Policy

Continuing unconventional monetary policy indefinitely, including ETF and REIT purchases and YCC, will not serve Japan's long-term interests, Nakao asserts.

Risks of Prolonged Easing in Japan

In Japan, the dangers of extended easing include excessive yen weakening and deteriorating fiscal discipline, as opposed to lagging in combating inflation, Nakao explains in the interview.

Potential Risks of Large Fiscal Deficits and BOJ's Assets

Fiscal deficits and the BOJ's assets have grown so large relative to GDP that there could be potential risks of sharp increases in interest rates and sudden currency falls, leading to inflation, according to Nakao.

Nakao's Background and Current Position

Takehiko Nakao served as the president of the Asian Development Bank from 2013 to early 2020 and currently holds the position of "Chairman of the Institute" at Mizuho Research and Technologies, a subsidiary of Mizuho Financial Group Inc, Japan's third-largest commercial bank.