MNI INSIGHT: BOJ Sees Risk Of Volatility If Fed Hikes Fast

Bank of Japan officials are concerned that financial markets could be destabilised if the Federal Reserve is forced to carry out a series of rapid rate hikes to tame inflation, MNI understands.

While BOJ officials agree with the Fed's assessment that a surge in U.S. consumer prices is transitory and trust that it should be able to keep inflation under control if it acts in a timely fashion, they consider that should it fail to do so subsequent sharp changes in rates could prompt heavy outflows from emerging economies and other markets.

It will be crucial for the Fed to proceed at a measured pace and to communicate clearly with markets, officials believe. The BOJ's baseline view is that the Fed will conclude tapering its bond purchases by the middle of 2022 and raise rates afterwards, MNI understands.

Separately, BOJ officials earlier this month indicated that Japan's central bank could respond to rapid changes in interest and exchange rates by adjusting yield curve targets. (see: MNI INSIGHT: BOJ May Consider 10-Yr Yield If Yen Hits 125 Fast.)

INFLATION SURGE LOOKS TRANSITORY

For the moment, the BOJ regards the spike in U.S. consumer inflation as transitory, as supply chain disruptions lift prices temporarily. But the risk is rising that prices will accelerate further and leave the Fed behind the policy curve, they believe.

U.S. core producer prices jumped 6.8% year-on-year in October and by a more-than-expected 0.4% on the month. Consumer prices for October are due on Wednesday with the core gauge widely expected to remain above 4% on year and 0.4% on month. Fed Chairman Jerome Powell has acknowledged that inflation has proven stubborn. (See MNI State of Play: Fed Tapers Amid Less Transitory Inflation.)

In the latest BOJ policy review in October, Governor Haruhiko Kuroda also suggested that the central bank was relaxed about yen weakness against the dollar at the time, adding that QE tapering doesn't imply any direct signal regarding Fed interest rate policy.

Japan too faces supply-chain disruptions, particularly with semiconductors for the automotive sector, and the impact of high imported energy costs, that have caused some concerns about the pace of an economic rebound from pandemic measures that largely ended at the start of October.