Bank of Japan nominee Haruhiko Kuroda talks tough on deflation

The Japan government's nominee to be the next central bank governor outlined more forceful policy prescriptions on Monday to finally defeat deflation, saying he would not set any limits on the amount of cash the Bank of Japan pumps into the economy.

Living up to his billing as an aggressive central banker, Haruhiko Kuroda told lawmakers the central bank's current policies were not powerful enough to boost inflation to 2 per cent, a target he said the central bank should strive to achieve in two years.

Mr Kuroda suggested the most natural way to ramp up the central bank's stimulus for the economy would be huge purchases of longer-dated government bonds. The BoJ should also consider kicking off its open-ended asset purchases early, rather than waiting until the scheduled start date of 2014.

"It would be natural for the BoJ to buy longer-dated government bonds in huge amounts," Mr Kuroda said in a confirmation hearing in the lower house of parliament. "But the central bank also needs to scrutinise market developments at the time, as well as the potential drawbacks."

Prime Minister Shinzo Abe nominated Mr Kuroda, president of the Asian Development Bank, to be the new governor in a push for bolder central bank efforts to end nearly two decades of debilitating deflation and revive the fortunes of an economy stuck in its fourth recession since 2000.

His nomination is expected to be approved by parliament because opposition parties, whose support would be needed in the upper house, have indicated they would back him.

The prospect of BoJ buying longer-dated bonds prompted a market rally, led by the longer end. Yields on 20-year bonds dropped to a seven-month low of 1.550 per cent. Yields on 5-year debt hit a record low of 0.110 per cent.

Japan's former top currency diplomat, Mr Kuroda, 68, would replace incumbent Masaaki Shirakawa, 63, who is due to leave office on March 19 along with his two deputy governors.

Under Mr Shirakawa, the BoJ has agreed to buy assets or make loans totalling ¥101 trillion by the end of this year, part of which includes buying government bonds with a maturity of up to three years. It said in January it would switch to open-ended asset buying from 2014 to achieve the 2 per cent inflation target.

Mr Abe's demands for bolder action has already pushed the yen to a three-year low and the stock market to a four-year high as investors anticipated much looser policies. Sentiment in the government bond market reached a seven month high, a Thomson Reuters poll showed on Monday.

"Market expectations are high and it will be hard for the BoJ to do something to surpass such expectations," said Koichi Haji, chief economist at NLI Research Institute.

"You cannot deny the possibility that the central bank will ease before the scheduled first monetary policy meeting in early April to provide surprise."

If Mr Kuroda's nomination is approved, his first regularly scheduled policy review would be on April 3-4. Mr Abe has also nominated academic Kikuo Iwata, who supports unconventional monetary policy, and BoJ official Hiroshi Nakaso, who has hands-on knowledge of the central bank's inner workings, as deputy governors.

Mr Kuroda said that like other central banks, the BoJ should also focus on reducing long-term rates and risk premiums with the aim of increasing consumption and investment. The BoJ should not focus solely on the amount of money circulating through the economy, he said.

"Simply expanding monetary base won't be too effective," he told lawmakers.

* Reuters