Hiroshi Nakaso, candidate to lead the BOJ plans to reduce the emergency support

Bank of Japan (BOJ) deputy governor Hiroshi Nakaso declared that the central banks should stop the emergency support measures for the economy to avoid the moral hazard for the market. 

According to Nakaso, when the economy doesn’t achieve its full potential completely, it’s easier for the central bank to normalize the ultrasoft monetary policy. Investors have already decided that central banks will always help in times when markets are unstable.  Such an impression formed because of significant monetary payments during the coronavirus pandemic.   

Nakaso admitted that the moral hazard should be eliminated even though this is a difficult and controversial question. Crisis management, in turn, resembles the creation of a human-induced moral hazard, and it shouldn’t continue.

Nakaso thinks that to avoid moral hazard central banks could build lending facilities so that they are cheaper for investors in times of crisis, but grow in price when the market levels off. Such a scheme will possibly be useful to overcome the next financial crisis.

All this was said amid the intensified debates on how and when the new governor reduced the massive stimulus. Many think that they destroyed real market activity. According to Nakaso, the constant inflationary pressure is the result of large-scale support from the government.

Hiroshi Nakaso is considered one of the main contenders for the post of new Bank of Japan governor. Another main contender is Masayoshi Amamiya, the current BOJ deputy governor. The term of office of the current head Haruhiko Kuroda ends in April.

Unlike his competitor, Nakaso urges refusing large stimuli introduced under Kuroda. In his book, published this year, he detailed the steps a central bank should take to end the ultrasoft policy.

Nakaso spoke at the online symposium and participated in the meeting of national economic leaders together with prime minister Fumio Kishida. Their joint participation may cause rumors of mutual agreements.

Analysts suppose that any new head of BOJ won’t tighten the monetary policy immediately because the Japanese economy is quite fragile. Also, it is necessary to preserve the low cost of the large national debt.