MNI INSIGHT: BOJ Sets Stage for Rate Hike Before 2% CPI

--BOJ "Normalizes" Its View on Conduct of Monetary Policy

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan board is officially setting the stage for

raising interest rates before achieving its 2% inflation target, by quietly

conveying the message in an obscure paragraph on page two of its policy

statement issued last month, MNI understands.

     There is no immediate need to "normalize" the BOJ's large-scale monetary

easing, with inflation just under 1%, but the BOJ "has normalized its view on

how it should conduct monetary policy" because a majority of the nine-member

policy board is paying more attention to the costs of prolonged easing.

     In its statement issued after the July 30-31 meeting, the BOJ said it aimed

to make monetary easing sustainable by conducting asset purchases "in a more

flexible manner" while promising to maintain super-low interest rates "for an

extended period."

     "The bank recognizes that this will lead to achieving the price stability

target of 2% at the earliest possible time, while securing stability in economic

and financial conditions," it said.

     This paragraph, point number 4 of the statement, "didn't draw much

attention from the markets and media but it shows that the bank's viewpoint on

the conduct of monetary policy has become normal, although the policy in itself

is still far from being normalized," a person who is familiar with BOJ thinking.

     --SOFTENING AGGRESSIVE STANCE

     This means that the BOJ has declared that the bank has "officially"

abandoned the stance of trying to hit the 2% price target "at whatever cost,"

the person said.

     BOJ officials think this is one of the most important messages that the BOJ

intended to send through its latest policy statement.

     They also believe the new way of thinking among the majority of the board

should enable the BOJ to "adjust" the level of interest rates and the pace of

its asset purchases, before achieving the 2% price target, if the side-effects

-- low profit margins for lenders and lost returns on bond investments by

pension funds -- become more serious while the economy continues to recover and

wages grow at a faster pace.

     At the bottom of the statement, the BOJ also said it "will examine the

risks considered most relevant to the conduct of monetary policy and make policy

adjustments as appropriate."

     Previously, the bank simply said it will "make policy adjustments as

appropriate."

     --POLICY COSTS EYED

     The BOJ didn't elaborate on what "the risks considered most relevant to the

conduct of monetary policy" would be, but this means that the BOJ is paying more

attention to the accumulated costs of prolonged easing.

     The BOJ has acknowledged that it is likely to take more time than expected

to achieve the price stability target of 2%, and thus it is necessary to

maintain easing for a prolonged period.

     However, maintaining the easy policy for a prolonged period is already

increasing its side-effects, and it will be too late for the BOJ to take action

once financial imbalances or accumulated costs become serious, BOJ officials

view.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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

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