Bank of Japan Governor Masaaki Shirakawa opposed the central bank underwriting of Japanese government bonds for the second time in a week, a day after Fitch Ratings lowered its outlook for the country because of rising levels of government indebtedness.
Underwriting government bonds may lead to rapid inflation, which won't improve Japan's fiscal position, Shirakawa said in an address to the Japan Society of Monetary Economics at Meiji University in Tokyo. Underwriting JGBs would also may hamper bond issuance, raise yields on government debt and erode confidence in the yen, he said.
"Underwriting government bonds by a central bank, which may not appear problematic at first, will lead to limitless issuance of currencies and cause rapid inflation and devastate people's life and economic activities," Shirakawa said. "The improvement of fiscal balance can't be achieved by causing inflation."
Shirakawa is resisting pressure from lawmakers in the ruling Democratic Party of Japan and academics urging the bank to help finance reconstruction after the March 11 earthquake. So far, the BOJ has injected record amounts of cash into the money market and doubled to 10 trillion yen (Dh454 billion), a fund that buys assets including corporate debt to real estate investment trusts, a boost that is about one-tenth the size of the US Federal Reserves so-called QE2, or second round of quantitative easing.
The Bank of Japan also last month unveiled the one-year loan programme for banks, aimed at getting funds to companies hit by the quake.
The record temblor and tsunami in northern Japan left about 24,000 people dead or missing, and the government estimated that the cost of the damage could be as high as 25 trillion yen.
Prime Minister Naoto Kan has pledged 4 trillion yen in spending to help rebuild areas devastated by the temblor. Some lawmakers have called on the central bank to finance further stimulus packages by underwriting bonds, reducing pressure on Japan's debt burden, which is already the largest in the industrialized world.
"There is a higher risk of leaving the economic condition as poor as it is now than the risk from the BOJ's direct purchases of bonds," said Yoichi Kaneko, secretary-general of the DPJ's backbench Anti-Deflation Group and a former economist at the Paris-based Organisation for Economic Cooperation and Development.
Shirakawa said May 25 that underwriting government bonds could make the nation's debt expand beyond taxpayers' funding capacity.
The governor also said that the central bank's secondary market government bond purchases should be conducted at a "stable pace as much as possible." The BOJ currently buys 1.8 trillion yen in government bonds from lenders per month. Shirakawa said that Japan's bond yields are low at stable levels compared with other countries even though the country's fiscal conditions keep worsening because of confidence in the central bank.
"A major prerequisite for a central bank's ability to make aggressive actions is that the confidence in a central bank is maintained," he said. Without faith in fiscal and monetary policies, yields would rise and economic growth would suffer, he said.
Fitch Rating on Friday revised the outlook for its AA long-term local-currency rating for Japan to negative from stable, urging policymakers to put forward a "more credible" debt consolidation plan.
Japan's government debt is projected to reach 219 per cent of gross domestic product next year, the OECD said last week.
Shirakawa's 40-trillion yen boost in short-term funds since the March 11 quake eschews the scale of longer-dated asset purchases the Federal Reserve mounted after confidence in credit markets collapsed and the US entered its worst recession since the Great Depression.