MNI: BOJ To Carefully Mull Exit - Dep Gov Himino

The Bank of Japan must carefully consider the timing of any exit to easy policy and monitor the evolution of wages and prices, said BOJ Deputy Governor Ryozo Himino on Wednesday.

Achieving the bank’s 2% price stability target in a sustainable and stable fashion will require “walking a fine line in which inflation decreases, but not too far,” he told business leaders in Oita City.

Japanese monetary policy must address inflation, support moderate economic recovery, facilitate wage growth and prevent reemergence of deflation,” he added. “The Bank is struggling to find a solution and this is by no means an easy task."

MNI reported last week the BOJ was strongly considering an April exit to its easy policy settings, dependent on strong wage and GDP data. (See MNI POLICY: Economic Concerns Weigh On BOJ's April Exit Plan)

“In any case, relevant economic agents would need to carefully navigate and manage the exit phase. In particular, [the BOJ] should carefully monitor the evolution of wages and prices, judge the timing of the exit, and design its process.”

FINANCIAL STABILITY

Himino argued commercial banks can weather the impact of a policy shift. Financial institutions will replace legacy bonds with higher yielding fresh transactions, while the corporate sector will increase investments as the economy improves during the exit phase.

"This will likely increase loan demand and make it easier for the financial institutions to secure profit margins between deposits and lending,” he said.

Himino expects, however, a certain degree of stress in the short term. “It would be much easier for banks to find ways to be profitable compared to when they were in an environment of continued low interest rates. Appropriate risk management will be needed to weather the stress in the transition phase, but, in our view, the financial system on the whole has the necessary resilience to withstand such stress."