BOJ head contender Nakaso urges removal of emergency support steps

Central banks must remove emergency support measures once financial crises are over to avoid causing moral hazard in the market, former Bank of Japan (BOJ) Deputy Governor Hiroshi Nakaso said on Thursday.

Nakaso, who is considered one of the top candidates to become next BOJ governor, also said once an economy’s potential growth heightens, it will be easier for a central bank to normalise ultra-loose monetary policy.

Investors have come to assume that central banks will always come to the rescue when financial markets destabilise because of the massive monetary support deployed during the COVID-19 crisis, Nakaso said.

“This moral hazard must be removed once the crisis is over, though this is easier said than done because it’s a contradictory issue,” Nakaso said in a seminar hosted by the University of Tokyo and International Monetary Fund.

“Crisis management is like creating … artificial moral hazard,” he said. It shouldn’t stay forever.”

To avoid moral hazard, central banks could design their lending facilities so they are less costly to tap for investors in crisis situations, but become more costly when market normalises, Nakaso said.

“Maybe this is something we can revisit and study” in preparing tools to combat the potential next financial crisis, he said.

Nakaso’s remarks come amid growing debate about how and when the next BOJ governor will reduce its massive stimulus, considered by some as distorting market pricing.

Nakaso and incumbent BOJ deputy governor Masayoshi Amamiya are considered among top candidates to succeed BOJ Governor Haruhiko Kuroda, whose current term ends in April next year.

Neither of them would rush into tightening monetary policy given Japan’s fragile economy and the need to keep low the cost of funding its huge public debt, analysts say.

However, compared with Amamiya, Nakaso is seen more in favour of dialing back Kuroda’s radical stimulus. In a book published earlier this year, he laid out in detail how the BOJ could end ultra-loose policy.