By Leika Kihara
NARA, Japan (Reuters) – Bank of Japan board member Takako Masai said the global economy is on track for a rebound around mid-year as manufacturing activity picks up, signaling that risks such as the coronovirus outbreak do not warrant an immediate expansion of stimulus.
In a sign of concern over the cost of prolonged monetary easing, the former commercial banker said the BOJ must be ready to act not just to boost growth but to prevent its ultra-loose policy from disrupting the banking system.
“If there are signs of disruption in financial intermediation, we will of course take necessary steps including those to make our stimulus program more sustainable,” Masai told reporters on Thursday after meeting with business leaders in Nara, western Japan.
Masai added that she saw no imminent problems to Japan’s financial institutions, as they had sufficient capital buffers.
The BOJ’s nine-member board is split between those who see room to expand stimulus, and others who are reluctant to do so on worries over the rising cost of prolonged low rates such as the hit to financial institutions’ profits.
Masai, who has consistently voted with the majority of the board, said the coronovirus epidemic is among risks to the global economy and may hurt Japanese business sentiment.
A sales tax hike that rolled out last October could also weigh on consumption over time by reducing households’ real income, she said on Thursday.
But there was no change to the view that Japan’s economy will expand moderately thanks to robust capital expenditure and signs of pick-up in global manufacturing activity, Masai said.
“There seems to be signs of recovery in the manufacturing sector” as IT firms see demand perk up, Masai said.
“My assessment is that if these developments continue, overseas economies will pick up through the first half of 2020,” she said in a speech to business leaders in Nara, western Japan.
The remarks suggest that while the BOJ stands ready to ease policy further if risks derail Japan’s fragile economic recovery, it sees no imminent need to act.
Masai said she was mindful of growing concerns that years of near-zero rates could hurt economic activity by reducing the returns of pension products.
“Nonetheless, in my view, it is still indispensable that Japan persistently continues with the current (monetary) policy to overcome deflation completely,” Masai said.
“The BOJ will persistently devise measures considered necessary at the time,” while paying careful attention to the benefits and costs of its policy, she said.
Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and the 10-year government bond yield around 0% as part of efforts to hit its elusive 2% price goal.
Japan’s economy likely suffered a contraction in the final quarter of last year as October’s sales tax hike and slowing global demand hurt consumption and exports.
The BOJ expects the economy to recover this year and help fire up inflation toward its target, clinging to hope that global growth will rebound around mid-year and underpin exports.
But the widening fallout from the coronavirus has cast doubt on the central bank’s rosy projection, putting it under pressure to maintain or even expand its massive stimulus.
(Editing by Chang-Ran Kim, Jacqueline Wong & Shri Navaratnam)