MNI INTERVIEW2: Ex-BOJ's Yamaguchi Sounds Crisis Alarm

The global economy and financial markets face a serious crisis, underscoring the need for heightened vigilance, former Bank of Japan Deputy Governor Hirohide Yamaguchi told MNI.

“Stock prices in advanced economies deviate from economic fundamentals,” said Yamaguchi, now chairman of the advisory board at Nikko Research Center. 

“It is very difficult to predict when and how those stock prices collapse… the biggest trigger will be surges in long-term interest rates to be caused by various factors, including high inflation.”

He added that governments that were able to respond to the Lehman Brothers collapse no longer have the same fiscal capacity due to factors, such as increased military spending, and that if a shock were to occur, conditions more severe than the global financial crisis could emerge.

PRIVATE CREDIT

Rising commodity and inflation pressures are pushing up long-term yields in the U.S., with spillovers expected for Japan, he said, warning of rising anxiety among players in asset markets, such as stocks.

Fragile private credit funds are a key concern, with risks that a failure in the sector could destabilise the financial system, he added. 

He warned of a potential burst of asset bubbles, flagging vulnerabilities in private credit funds that drew parallels with the BNP Paribas shock in 2007.

Citing warnings from Jamie Dimon, CEO of JPMorgan Chase, who said that if there is one “cockroach,” there are likely many more behind it, he warned that such an event could significantly disrupt the financial system, intensifying downward pressure on stock and real-estate markets.

"U.S. authorities are surely paying attention to the risk as they have strong sense of crisis,” he warned, adding U.S. market players are sensitive to such a risk, while Japanese investors are less attuned.

Yamaguchi also said the Federal Reserve and central banks in advanced economies must pay great attention to and evaluate those significant shocks, taking the danger of asset bubbles into consideration.

PRESSURE POINTS

He pointed to three reinforcing pressures — wars, inflation, and financial-sector strain — arguing that a crisis beyond the Lehman episode cannot be ruled out. 

While the BOJ should prioritise containing inflation risks, the bank also must take plunges in asset prices into consideration, he said, adding that rising war-related fiscal spending is adding upward pressure on both inflation and interest rates while increasing strain on businesses, particularly non-banks.

“Under the current unstable and changeable conditions where various factors are complicatedly connected to each other, one thing may trigger a chain reaction or domino effect. That is a very crucial condition. There are various risks and high uncertainty,” Yamaguchi said, adding that if the BOJ is reluctant to tighten its credit grip, the bank will have more and more risks. (See MNI INTERVIEW1:BOJ Falling Behind Curve - Ex Dep Gov Yamaguchi)

Yamaguchi left the BOJ in 2013.