By Leika Kihara
(Reuters) -Bank of Japan Governor Kazuo Ueda said the central bank should reduce its huge bond purchases as it moves toward an exit from massive monetary stimulus, reinforcing his resolve to steadily scale back its nearly $5-trillion balance sheet.
The remarks keep alive expectations the central bank could embark on a full-fledged tapering of its bond buying as early as its policy meeting next week.
In March, the BOJ made a landmark shift away from its radical monetary stimulus by ending eight years of negative interest rates and yield curve control (YCC), a policy that caps the benchmark 10-year yield around 0% with huge bond buying.
But it pledged to keep buying roughly 6 trillion yen worth of government bonds per month to stop the March policy shift triggering an abrupt spike in yields.
“We are still scrutinising market developments since the March decision,” Ueda told parliament on Thursday. “As we proceed in exiting our massive monetary stimulus, it’s appropriate to reduce” bond purchases, he said.
Ueda has repeatedly said the BOJ will eventually taper its huge bond buying, but offered no clues on how soon it will start doing so.
The BOJ currently has 750 trillion yen ($4.8 trillion) in assets on its balance sheet, nearly 1.3 times the size of Japan’s economy, including government bonds.
On the question of further interest rate hikes, Ueda said the BOJ would move “cautiously to avoid making any big mistakes”.
There was, however, less conviction from BOJ board member Toyoaki Nakamura about policy tightening.
Speaking separately in the northern Japanese city of Sapporo, Nakamura, one of the board’s more dovish members, said the economy may see inflation fall short of the central bank’s 2% target next year if consumption stagnates.
“I’m not confident that wage rises will be sustained” as small- and mid-sized firms have yet to undertake sufficient reforms to boost profits and keep raising pay, Nakamura said on Thursday, highlighting uncertainty over the timing of further interest rate hikes.
In current projections made in April, the nine-member board’s median forecast is for core consumer inflation to hit 1.9% in both the fiscal year beginning in April 2025, and the one following in fiscal 2026.
“My view is that inflation may not reach 2% from fiscal 2025 onward” if households curb spending and discourage companies from raising prices further, Nakamura said in a speech to business leaders in Sapporo.
Nakamura, a sole dissenter to the BOJ’s decision to exit negative interest rates in March, also warned of recent weak signs in consumption and slowing global growth.
“Real wages need to turn positive and households’ disposable income to rise more, for a cycle of rising income and expenditure to strengthen,” he said, adding it was appropriate to maintain current monetary policy for the time being.
While Nakamura is an outlier on the board, his views highlight lingering uncertainties over whether the BOJ will see conditions fall in place to raise interest rates this year from current near-zero levels.
Ueda has said the central bank will raise rates again if underlying inflation, which takes into account various price gauges, accelerates toward 2% as it projects.
Many market players expect the BOJ to raise rates again this year, though they are divided on whether it will happen in the third or fourth quarter.
($1 = 155.8400 yen)
