Bank of Japan's monetary easing effects declining, says policymaker

A deflationary mindset is still prevalent in business circles and is inhibiting investments in one of the signs the effects of the central bank's monetary easing efforts may be lessening, a Bank of Japan (BOJ) policymaker said Monday.

According to Takehiro Sato, since further easing was unveiled in October last year, the rate at which nominal interest rates have declined have been disappointing despite the bank upping its purchases and this has been revealed by a just moderate drop in longer-term interest rates.

"The pace of decline in nominal interest rates has been minimal despite the progress in the bank's purchases, as evidenced by a limited decline in longer-term interest rates after the further loosening of monetary policy in October last year," the central bank policymaker was quoted as saying.

Sato maintained that the negatives of the bank's asset purchasing program, being expanded from an initial 60 trillion to around 80 trillion yen in a bid for the BOJ to ramp up its mission of reversing deflation that has mired the economy for decades, may begin to outweigh the positives.

The BOJ's program was supposed to, for example, jolt businesses into investing more and kickstarting a sustainable economic recovery, but such effects remain to be seen, as Japan's economy contracted in the third quarter owing to waning business investment and slumping inventories.

The world's third-largest economy entered a technical recession for the second time since Prime Minister Shinzo Abe came into office in 2012 and unveiled two editions of his aggressive "Abenomics" blend of economic policy.

The Cabinet Office said the economy contracted an annualized 0.8 percent in the July-September quarter of 2015, marking a second straight quarterly contraction, following a revised 0.7-drop in the second quarter.

While exports showed an uptick of 2.6 percent following a 4.3-percent dip in the previous quarter, the government's data showed, most notably, that corporate capital spending dropped 1.3 percent, the second straight quarterly fall, as firms remain circumspect due to a slowdown in emerging economies and the economic outlook in the short-to-mid term.

Sato said the bank continuously extending its easing measures will do little to dispel the nation's deflationary mindset, which inhibits corporate capital spending, employment prospects, as well as general consumption and household spending, all key GDP components, and could lead to the continuation of a lack of faith in the bank's ability to reverse deflation.

"I initially did not expect that quantitative and qualitative monetary easing, which is a kind of shock therapy that influences formation of people's inflation expectations through massive asset purchases, would be continued for a very long time," Sato said, adding that the economy has not managed to quash the deflationary mindset and businesses remain cautious about investing and hiking wages.

If the bank continued on the same policy trajectory that its "operations might become problematic" if it failed to reverse the corporate and private mindset and re-instill faith in the bank's reflationary capability.

"I would like to take into account the sustainability of the bank's market operations," said Sato, one of the bank's nine Policy Board members, regarding whether the BOJ's policy should be continued. Enditem