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Economy

Ex-BOJ chief feared 'killing' interest rates with easing

New documents show Fukui worried about risk of buying too much public debt

Then-Bank of Japan Gov. Toshihiko Fukui speaks to reporters after a monetary policy meeting in April 2003, the year he took the post. (Nikkei archives)

TOKYO -- Japan's central bank governor from 2003 to 2008 resisted purchasing more government debt and regretted not raising interest rates faster, newly released documents show.

"After taking office, I quietly decided to myself that I would not increase buying of long-term debt," Toshihiko Fukui told Bank of Japan researchers during interviews held in 2016 to 2017.

"I also felt conflicted about quantitative easing... I understood that killing the function of interest rates would weaken the mechanism for economic regeneration," he said.

He added that he felt the need to avoid the central bank becoming too involved in fiscal policy by holding too much long-term government debt.

When Fukui left office in March 2008, the U.S. subprime mortgage crisis was rippling through the American economy. Wall Street investment bank Lehman Brothers would collapse half a year later.

Fukui also sounded a note of doubt on ultralow policy interest rates, saying 1% is the lowest level at which rates can function. Bankers now find themselves in a world of negative borrowing rates.

Records of the interviews, published recently following a disclosure request by Nikkei under Japan's freedom-of-information law, show how Fukui wrestled with a problem that has ballooned since his tenure.

Under current BOJ Gov. Haruhiko Kuroda, the bank's purchases of government bonds peaked at 80 trillion yen ($730 billion) a year. They have since fallen to around 20 trillion yen a year but remain far higher than the level that prompted Fukui's misgivings.

The BOJ began quantitative easing -- targeting the money supply rather than interest rates to stimulate the economy -- under Fukui's immediate predecessor, Masaru Hayami. By the time Fukui took over, the pace of bond buying had jumped to 1.2 trillion yen a month.

Fukui-era BOJ policy also offers possible parallels for an eventual exit strategy from the central bank's current phase of quantitative easing.

Under Fukui, the BOJ ended quantitative easing and its zero-interest policy in 2006. But he described its subsequent interest rate hikes, which took its benchmark short-term rate to 0.5%, as "incomplete."

"If we had reached about 1%, I would have felt a little at ease when handing over the reins," Fukui said, according to the records. Another reason for this is that it would have given the bank more latitude to cut interest rates later, he explained.

Critics say the timidity of past easing measures is one reason Kuroda's BOJ was forced to resort to drastic action, such as greatly stepped-up bond buying and purchases of exchange-traded funds.

Under career central banker Fukui, Japan could not shake off the deflationary mindset that has been blamed for low price and wage growth. The BOJ did not set an inflation target, although it did debate ways to increase the transparency of its monetary policy decision-making.

Fukui called 2% consumer price growth -- the BOJ's target under Kuroda -- "common-sensical" but said it was unrealistic during his own tenure.

"In Japan's case, with deflation ongoing for so long, when I thought about taking responsibility for such a target, it seemed too great a distance," he said, according to the documents.

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