Central banks must avoid debt-monetizing stigma

Central banks must avoid letting their purchases of government debt be seen as a way to finance spending, rather than an effort to boost growth, a top Bank of Japan official said on Friday.

"We must avoid causing problems in national debt management," said Kiyohiko Nishimura, deputy governor of the Bank of Japan, during a presentation at the American Economics Association. "It is crucial to avoid an impression of monetization of debt."

Long-term interest rates could spike if markets feared the central bank was funding government spending, he said.

The Bank of Japan in October set up a 5 trillion yen (USD 60 bn) asset buying program to pump more money into the struggling economy and to peg interest rates virtually at zero until price stability is in sight.

Japan's asset purchase program is aimed at reducing risk aversion in capital markets, Nishimura said.

Other central banks including the US Federal Reserve have launched programs to buy longer-term government securities in a bid to boost economic growth when benchmark short term rates are near zero.

Nishimura said the United States and Japan both experienced the bursting of asset bubbles as the populations of both societies are becoming older.

Both countries are adjusting to lower levels of debt after periods of excess -- Japan in the corporate sector, the United States in the household sector, he said.