MNI INSIGHT: Bank Of Japan Must Review Policymaking Process

--As Fed Looks To Review Policy, Seems Time For BOJ To Follow

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan needs to review its conduct of monetary

policy based on traditional economic modelling, as consumer prices still aren't

picking up as much as the output gap and the tight labor market conditions would

suggest, MNI understands.

     The BOJ has made achieving its 2% price target the top priority, with the

bank needing to maintain the easy policy for a prolonged period under the

current policy.

     This will increase the accumulated costs that the BOJ must assume and the

risks that market players must face, which in turn will undermine the stability

of the financial system.

     --DISTANT TARGET

     The BOJ still thinks Japan's consumer prices will rise and move toward the

2% target, as upward pressure on prices stemming from the positive output gap

will emerge with a time lag and the tight labor market conditions will help push

wages higher.

     However, prices and wages haven't risen as the BOJ has forecast, as

structural changes across the economy are impeding higher consumer prices,

indicating a break with previous expectations.

     --SLOWING CORE CPI

     Japan's nationwide core consumer price index rose 0.9% on year in November,

decelerating from 1.0% in October, leaving BOJ officials cautious over their

inflation outlook. The inflation rate remains stubbornly slow in responding to a

sustainable economic expansion and tight labor market conditions, with firms

still cautious about raising retail prices.

     It will take a long time for the inflation rate to hit 2% and the BOJ must

maintain its easy policy as long as it aims at achieving the 2% price target.

     But now is a good time for the BOJ to consider whether it is appropriate

base monetary policy aimed on the 2% price target, as economic structures have

changed.

     --FED REVIEW

     The U.S. Federal Reserve has realized that traditional management of

monetary policy isn't consistent with current economic and price conditions and

the Fed ushered in the need of reviewing policymaking process.

     In November, the Fed said it plans to invite external stakeholders to

review its policymaking processes next year in a broad outreach effort that

appears similar to what some other central banks do from time to time.

     "With labor market conditions close to maximum employment and inflation

near our 2 percent objective, now is a good time to take stock of how we

formulate, conduct, and communicate monetary policy," Fed Chair Jay Powell said

in a press release.

     This Week, Olly Rehn, Finland's national bank governor and a member of the

European Central Bank's Governing Council, called on the ECB to undertake a

similar review of its available policy tools.

     --BOJ RESPONSE

     BOJ economists need to analyse carefully how there appears to be a

breakdown in previous correlations, with inflation seemingly slow to respond to

the improving output gap, or whether a pick-up in inflation will come, just

delayed.

     The BOJ, in a similar way as the Fed is aiming to, needs to increase the

transparency and accountability and build greater public trust in the central

bank regarding the conduct of monetary policy.

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

[TOPICS: MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]