MNI ANALYSIS: BOJ Mulling Rate Hike For Sustained Easing

--Focus on July Outlook Report Argument, Govt Tax Hike Decision

By Max Sato

     TOKYO (MNI) - The Bank of Japan is laying the groundwork for scaling back

the degree of aggressive monetary easing to make the policy framework more

sustainable and head off excessive investment and a further squeezing of profit

margins for lenders.

     BOJ policymakers have been saying it will take time before the bank can

achieve its 2% inflation target and they must watch both the costs and benefits

of large-scale stimulus.

     The BOJ plans to release the results of its review of why consumer prices

are slow to react to an economic recovery and labor shortages following its July

30-31 policy meeting.

     --COSTS AND BENEFITS

     In addition to that, the central bank is also expected to stress in its

quarterly Outlook Report the points it has been making -- it must ensure its

massive asset purchases and zero to negative interest rate targets will not

cause financial imbalances and that slight adjustments to the easing program

would not amount to a credit tightening.

     "There is a clear setback in board member Harada's view on the monetary

policy outlook," said Shunsuke Kobayashi, economist at the Daiwa Institute of

Research.

     Yutaka Harada, a former government economist who joined the nine-member

policy board in March 2015, initially argued that boosting the amount of cash

available for economic activity would push up inflation toward 2%.

     --HARADA SETBACK

     However, in his speech on Wednesday, Harada toned down his reflationist

argument, and instead, sought to justify the aggressive easing launched in April

2013.

     He noted Japan's labor productivity growth accelerated at a pace faster

than in the U.S. from 2012 to 2017 and that the growth rate of its real

purchasing power parity GDP per working-age person was the highest among the

Group of Seven major economies during the same period.

     "It was unlike his usual tone. His remarks were more backward-looking and

defensive," Kobayashi said.

     Harada said the already low unemployment rate must fall further to help

push up the below 1% inflation rate toward the bank's stable 2% target. but

carefully added, "I am not saying that monetary easing should continue until the

unemployment rate has fallen to 2%."

     Asked about the BOJ's "inflation-overshooting commitment," under which it

will continue monetary easing until inflation is firmly anchored around 2%, even

if gains in the core CPI (excluding fresh food) overshoot that level for a time,

Harada told reporters, "There is a good chance that the inflation rate will rise

too far above 2%."

     He even projected, "We may reduce the degree of easing even before we

achieve 2% inflation if we can confirm that the inflation rate will reach 2%."

     --GROUNDWORK FOR HIKE

     After the July meeting, BOJ Governor Haruhiko Kuroda is likely to repeat

his view that the degree of monetary easing will intensify if the natural rate

of interest -- the interest rate that is neutral to the economy's output gap --

is rising above real interest rates.

     "By using this argument, the BOJ will raise the target for interest rates

if it gets the go-ahead from the Prime Minister's Office," Daiwa's Kobayashi

said. He expects the bank to move at its Oct. 30-31 meeting if the inflation

rate is picking up and the yen is stable.

     "Another key is whether the government delays again its plans to raise the

sales tax in October 2019. If the PMO tells the BOJ that the tax hike will be

postponed, the BOJ can raise rates."

     BOJ board member Takako Masai cautioned in a speech Thursday that the sales

tax hike could have a "significant" impact on pensioners, although the BOJ has

estimated that the drag from the tax hike should be smaller than the impact of

the previous hikes, in 2014 and 1997.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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