MNI INTERIVEW: Japan Needs An Adaptive Inflation Review: Sekine

Changing price expectations in Japan is a hard nut to crack because getting the right mix of monetary and fiscal policy and consumer responses remains one that requires more analysis on the entrenched mechanism of adaptive inflation expectations, former Bank of Japan chief economist Toshitaka Sekine told MNI.

"The BOJ has concluded that Japan's adaptive inflation expectations formation is complex and sticky, so inflation expectation will not rise, and the BOJ cannot raise inflation expectations with monetary policy alone," Sekine, now a professor at the School of International and Public Policy at Hitotsubashi University, said.

"I'm wondering whether it is sufficient for the BOJ to conclude that Japan's inflation expectations will not rise as a backward-looking formation remains strong," Sekine said, adding the BOJ should avoid a set conclusion.

BOJ policymakers are also studying inflation in new ways, including the impact from climate change as reported: MNI: BOJ Faces Homework On Climate Change Lending And CPI.

OPTIONS ON POLICY

Sekine said the BOJ's ability alone to influence inflation expectations through interest rates is limited and fiscal support has proven harder to coordinate, as have stubborn consumer expectations on prices.

"The BOJ continues to face the zero-lower bound (ZLB), but the BOJ must make efforts to support the economy. However, fiscal policy is vital as the natural rate of interest remains at low levels," Sekine said.

The latest Tokyo core inflation data posted the first year-on-year rise in 12 months in July and the BOJ has maintained the view that the underlying trend of inflation rate excluding special factors remain solid

But the government has shown caution on going forward structural reforms and a growth strategy unless Japan's economy improves.

"Under the existing conditions, the government needs to continue to have an expansionary fiscal policy, although there is a limit. But such a view isn't sufficiently understood," Sekine said. He said the government can increase fiscal spending when the safe neutral interest rate, (which was consistent with potential output), is less than the growth rate."

HOUSEHOLDS KEEP SAVING

Another key question is why households want to increase savings in a low-inflation environment instead of spending on goods and services, he said, adding there is no clear-cut answer, but many views, and even a benefit.

Excessive household savings enable the government to spend on fiscal policy, so interest rates can stay at low levels in Japan, Sekine said. Changing that dynamic is key for the longer-term price outlook, he said.

A "high pressure economy caused by policy mix will increase productivity and raise the natural rate of interest, which in turn will pave the way for the BOJ to normalize its policy, although the road is considerably long," Sekine said.