BoJ’s ultra-loose monetary policy and regulations might lead to asset bubbles – BNPP

FXStreet (Barcelona) - Raymond Van der Putten of BNP Paribas, notes that BoJ’s ultra-loose monetary policy could create a perverse environment where monetary policy is directed to achieve fiscal objectives, and the macro-prudential regulations will lead to forced buying of JGBs at negative rates, which might see asset bubbles cropping up.

Key Quotes

“In our view, the main risk is that, by keeping interest rates low, the BoJ’s ultra-loose monetary policy could have a perverse effect by making the budgetary authorities complacent on fiscal consolidation and less ambitious in pursuing structural reforms. This could create an environment of fiscal dominance in which monetary policy is directed towards achieving fiscal objectives.”

“Macro-prudential regulations will force financial institutions to continue buying JGBs at negative real rates. This strategy is not without risk, as asset bubbles may start building up.”

“In addition, without structural reforms, Japan is likely to remain stuck with low potential growth, which will complicate the necessary budget consolidation.”

“Lastly, the low potential growth does not only have a negative impact for Japan but for also for its main trading partners, in particular in Asia.”

“A large part of the industrial world is currently struggling with low inflation or declining prices and subdued growth. Many European countries have responded by implementing structural reforms. The thousands little needles of Japan’s structural reform programme might be a source of inspiration. However, Japan’s experience shows that it may take considerable time for the cure to work.”