MNI: High Uncertainty, Despite 2% Strengthening - BOJ Uchida

Bank of Japan Deputy Governor Shinichi Uchida's comments on Thursday has somewhat weakened the chance of a March policy change, despite noting the probability of the Japanese economy achieving the 2% price target had increased.

“The 2% target is expected to be achieved in a desirable manner accompanied by wage increases," Uchida told business leaders in Nara City. "The likelihood of realising this outlook has been gradually rising, although there remain high uncertainties over future developments.”

Uchida largely endorsed remarks made by BOJ Governor Kazuo Ueda at a news conference in January, where he noted 2% was insight should the virtuous cycle strengthen.

RAPID HIKES UNLIKELY

“Even if the Bank were to terminate the negative interest rate policy, it is hard to imagine a path in which it would then keep raising the interest rate rapidly," Uchida said. "The Bank would, I think, maintain accommodative financial conditions even if the termination were to take place.”

MNI reported this week the Bank would likely stick to gradual tightening following an end to negative rates, which will likely occur in April. (See MNI POLICY: BOJ To Pursue Mkt Friendly Hikes After Policy Exit) Uchida's comments had little impact on market expectations, with traders still giving a 55% chance on an April adjustment.

"Going forward, the Bank will monitor developments in the virtuous cycle between wages and prices by carefully examining various data and information,” he added. “If sustainable and stable achievement of the 2% target comes in sight, the large-scale monetary easing will have fulfilled its role and the Bank will explore whether it should be revised."

He also said the Bank will need to devise both communication and market operations so as not to create discontinuity in financial markets before and after the revision. "From this perspective, it is important for the Bank to explain its basic thinking on potential revisions to individual measures, as far as is possible."

Uchida added, should the Bank terminate or change its policy framework, it will consider the best way to indicate how it will conduct JGB purchases, taking account of market conditions and forecasting developments down the road.

“Of course, if the Bank does revise the framework, it will incline more toward letting interest rates be determined by the market. In doing so, however, it will take careful measures so as not to create discontinuity before and after the revision, and will make sure that the amount of JGB purchases will not change significantly and interest rates will not rise rapidly.”

JAPAN DIFFERS FROM US

Uchida noted that medium- to long-term inflation expectations were anchored at 2% in the U.S. and Europe, but those expectations in Japan were still climbing toward 2%.

“This means that an accommodative monetary policy is needed to lift inflation expectations further and to be mindful of the risk that they would fall again,” Uchida said.