MNI INTERVIEW 1: Measured Tweaks Ok For BOJ Policy-Ex Official

The Bank of Japan should not "frantically" curb 10-year Japanese Government Bond (JGB) yields to avoid a weaker yen and instead fine tune policy ahead of expected financial market volatility this year caused by likely Fed rate hikes, a former central bank executive director told MNI.

Changes to easy policy should be measured, said Hideo Hayakawa, also former BOJ chief economist and now senior fellow at the Tokyo Foundation for Policy Research.

“Looking ahead, upward pressure on the 10-year long-term interest rate will increase as the U.S. Federal Reserve is set to raise its policy interest rate," Hayakawa said.

"Premature policy normalisation by the BOJ is very unlikely as such a move will cause big risks or costs afterward. But a fine-tuning may be feasible."

“Personally, I have been saying that shortening the 10-year policy interest rate, for example, to a five-year rate is the best option that the BOJ can take. The idea of shortening the long-term policy interest rate is largely supported by many economists."

Benchmark JGBs neared 0.2% this week, the upper end of the perceived target of around plus and minus 0.25%, in a sign that financial markets expect higher rates, he said, see: MNI INSIGHT: No BOJ Intervention Now As 10-Yr JGB Yield Rises.

“However, the issue is whether the BOJ needs to frantically curb higher long-term interest rates. There is room for thinking,” Hayakawa said.

Also see: MNI INTERVIEW 2: Fed QE Length May Mean More Hikes-Ex-BOJ Exec.

LIMITED CHOICES AND BAD INFLATION

Hayakawa said the set of choices for the BOJ is to manage policy so that the yen does not weaken sharply and cause a surge in imported commodity costs or signal an unintended move to unwind easy policy.

The BOJ can reduce the outstanding balance of JGBs, through redemptions and fewer purchases and widen the 10-year interest rate in increments. “The BOJ didn’t say publicly but (the bank) is tapering,” reducing purchases of Japanese Government Bonds (JGBs) and ETFs (exchange traded funds) last year, he said.

“If the BOJ tries to frantically curb higher long-term interest rates, it will be interpreted to mean that the bank is willing to weaken the yen, which in turn will push up import prices.,” Hayakawa said.

"Nobody is happy with the rise in raw material prices. So that’s (curbing higher long-term interest rates) a little stupid idea," adding that a "rise in prices accompanied with a worsening of the terms of trade is a bad price rise."

The worsening of the terms of trade are borne by households and businesses, making them "real problems" and not just “nominal problems,” Hayakawa said, noting the political implications on these costs ahead of Upper House elections this summer.