Since adopting in 2016 a policy capping borrowing costs, the BOJ’s policy is essentially financing public debt and is integrated into the government’s debt-management strategy, Masanao said. “It’s impossible for the BOJ to make an independent decision on exiting ultra-easy policy. Any move toward an exit would need to take into account the impact on long-term interest rates and fiscal policy,” he said. California-based PIMCO, a unit of German insurer Allianz , managed 12.84 trillion yen ($121.90 billion) in assets for Japanese clients as of June 2020. Suga, who was elected as new prime minister on Wednesday, has vowed to break barriers that hamper competition and pursue reforms to revitalize the world’s third-largest economy. If successful, Suga would provide the missing third arrow of his predecessor Shinzo Abe’s “Abenomics” policies that consisted of bold fiscal, monetary easing and structural reforms. But Masanao said he was doubtful Suga can push through painful reforms, when there is little fiscal and monetary ammunition left to support an economy hit by COVID-19. “Abenomics succeeded in boosting growth and jobs, which was why Abe stayed in power for so long. But he didn’t use the political capital to push through reforms,” Masanao said. “Suga also has a structural reform agenda. But the point is you need to first reflate the economy to undertake real reforms, which are by nature deflationary at least in the short run.” Japan deployed two huge spending packages, accompanied by monetary easing steps by the BOJ, to cushion the blow from the pandemic that pushed the economy into deep recession. By successfully capping borrowing costs at zero, the BOJ will likely allow the government to keep spending massively without causing an unwelcome spike in inflation, Masanao said. But maintaining huge fiscal and monetary support for too long could distort market pricing and hurt Japan’s productivity by hampering reallocation of resources to growth areas, he said. “The unintended consequences of prolonged ultra-loose policy are huge, most notably by distorting asset prices,” Masanao said. “It’s eliminating the chance of proper market pricing.”