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He
also defended the BOJ's negative interest rate policy, saying
that it will spur capital expenditure by pushing down corporate
borrowing costs and offset demerits such as squeezing financial
institutions' margins.
"We must of course be mindful of various side effects of
negative interest rates, such as the effect on market liquidity,
in guiding policy. Even so, the positive effects (of negative
rates) are big," Nakaso said, suggesting that further rate cuts
were not off the table if the BOJ were to ease again.
The BOJ surprised markets in April by keeping policy steady
despite once again pushing back the timing for hitting its 2
percent inflation target, opting to spend more time to assess
the effects of negative rates on the economy and prices.
"We deemed it appropriate to scrutinise our policy effects in
April .... But that doesn't rule out the possibility of taking
additional easing steps if needed," Nakaso told business leaders
in Akita, northeastern Japan, on Thursday.
While sticking to the view that Japan's economy will keep
recovering moderately, Nakaso cited uncertainty over the global
economy and financial market volatility. He also acknowledged
weakness in private consumption and inflation expectations.
The central bank's nine-member board is likely to weigh such
risks at its policy review next week.
The BOJ's decision in January to adopt negative rates has failed
to arrest an unwelcome yen rise, drawing criticism from
lawmakers and financial institutions for confusing rather than
calming markets.
Critics say the Japanese government bond (JGB) market no longer
properly reflects investors' economic and inflation expectations
because the BOJ is distorting market functions with negative
rates and massive bond purchases.
Nakaso, a former career central banker, said he was mindful of
the need to ensure that bond prices move in a way that properly
reflect investors' economic and price outlooks.
On the trigger for further easing, Nakaso said he was looking at
whether households and firms would boost spending, and whether
price rises would be accompanied by wage gains.
"I think the mechanism for which prices rise in tandem with wage
gains is firmly in place," he said.
Japan's economy averted recession in the first quarter of this
year but analysts expect growth to remain feeble in the current
quarter on weak consumption and exports.
(Reporting by Leika Kihara; Editing by Chang-Ran Kim and Kim
Coghill)
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