MNI INTERVIEW: Keep BOJ Guidance Despite Yen, Inflation -Momma

The Bank of Japan should maintain its current accommodative guidance and even ease further as the yen weakens, leaving the government to address the effects of rising import costs for producers and consumers via fiscal measures, a former BOJ chief economist told MNI.

“The rise in prices is partly caused by the weak yen but it is led by the rise in international commodity prices, such as for crude oil and grain. The focus is on how Japan addresses the high costs, not the weak yen,” Kazuo Momma, who was also executive director in charge of monetary policy, said in an interview on Monday. “If the rise in raw material prices has subsided, firms will not raise retail prices. Looking ahead, it is unlikely that crude oil prices will rise at the fast pace seen from last year to this year.”

The yen traded at around 128.40 to the dollar in Tokyo trade on Monday after reaching 129 last week, its weakest level in 20 years, and Momma said further yen depreciation looks likely as the Federal Reserve is expected to hike rates by 50 basis points in May.

MORE DEPRECIATION AHEAD

“From the viewpoint of macro-policy, the biggest issue that the BOJ faces is a weaker economy, not inflationary pressure. The BOJ should conduct additional easy policy under normal circumstances,” he said, speaking ahead of the BOJ’s two-day policy-setting meeting scheduled to end on Thursday.

While some investors have speculated that the BOJ could alter its yield curve control framework or remove a reference to the possibility of reducing interest rates to “lower levels” from its guidance, Momma saw little scope for any such move.

“The forward guidance is linked to achieving the 2% price target. The BOJ does not have a reason for changing the forward guidance now,” he said. And yet, while Momma considers it would make more sense for the BOJ to ease further, he said the central banks lacks the tools to do so.

MNI has previously reported that the BOJ will look past the weakening yen for now, as officials’ concerns focus on its impact in eroding real wages. (see MNI INSIGHT: BOJ To Look Past Yen, Keep Guidance)

WAGE GROWTH STILL INSUFFICIENT

The BOJ is only likely to reduce accommodation once the inflation target is in sight on a sustained basis, or if it judges risks from the negative side-effects of prolonged easy policy to be too great, according to its former chief economist.

"Eventually, the BOJ will return to the previous normal monetary policy targeting the unsecured overnight call loan rate,” said Momma.

While inflation is likely to rise to about 2% or higher in the short term, this will be driven by temporary rises in food and crude oil prices, he said, adding that the BOJ board’s median forecast for inflation this fiscal year will be revised up above 1.5% from the 1.1% projection made in January.

Wage hikes would have to run at more than 2% a year on a sustained basis for the inflation target to be met, something which is still not occurring, Momma said.

The board’s median forecast for real economic growth will be revised down to about 2% level from January’s +3.8%, said Momma, noting that the diffusion index of “rise” minus “fall” with regard to the output price in the BOJ Tankan business sentiment survey as import prices have risen by 30 to 40%.