MNI INTERVIEW: FY25 Prices Key To BOJ Policy Change – Sekine

Future policy adjustments by the Bank of Japan will rest on whether it becomes more confident in coming board meetings of achieving its forecast for fiscal 2025 median core-core inflation of 1.8%, former BOJ chief economist Toshitaka Sekine told MNI, adding that a further move away from ultra-easy settings could come this year.

While at its meeting next week the BOJ Board will raise median core inflation projections for this fiscal year and next due to yen weakness and higher crude oil prices, the bigger concern is how wages and global economic uncertainty affect the outlook for fiscal 2025 core-core, said Sekine, who left the Bank in 2019 and is now a professor at the School of International and Public Policy at Hitotsubashi University.

The BOJ has become increasingly concerned about the risk of falling behind the curve on containing inflation since July, when it raised its cap on 10-year government bond yields to 1%, and this risk may since have risen further, he said in an interview.

“Market players should focus on whether the 1.8% price view is maintained and whether the BOJ increases its confidence in the probability of achieving that number,” Sekine said in an interview. “That will be the focus at the December and January meetings.”

10-YEAR YIELD CAP

The Bank is likely to raise its yield cap again some time in the fourth quarter, Sekine said, adding that if it ever finds itself behind the curve it could have to gradually increase this closer to 1.8% or 2%, in line with the Taylor Rule. In July, its yield cap rise was tempered by its assessment of the downside risk from premature tightening, he said. (See MNI INTERVIEW: BOJ Could Raise YCC Limit Again In 2023-Sekine)

“This is the BOJ’s logic. If the BOJ judges the risk of falling behind the curve is becoming bigger, the Bank will allow itself to contemplate allowing the 10-year rate to rise to around 2%,” Sekine said.

While some observers expect the Bank to wait until April before taking a significant step away from easy policy, and Governor Kazuo Ueda last month tried to dispel market speculation of a shift by the end of the year, change might be coming in months, Sekine said.

The path of wage hikes next year will become apparent towards the end of 2023, through various data sources in addition to BOJ surveys and hearings from corporate executives, he said.

“I think what Governor Ueda wanted to say is that the BOJ could have enough data by year-end to determine whether it can adjust easy policy and the BOJ could change policy before April,” Sekine said, though he cautioned that conflict in the Middle East conflict could cloud BOJ decision-making.