MNI INTERVIEW: BOJ Eyes Yen Despite Small Impact So Far-Sekine

The weak yen could hasten monetary tightening should it feed upside price risks, even if the underlying inflation trend remains below its 2% target, a former Bank of Japan chief economist told MNI, though he noted the impact of currency weakening on inflation so far had been minimal.

Toshitaka Sekine, professor at the School of International and Public Policy at Hitotsubashi University, said the BOJ is focused on the impact of forex on prices, particularly on potential second-round effects. If these accelerate, it could prompt it to consider reducing the degree of monetary accommodation, he added.

“Market players should abandon the view that the BOJ will not adjust its easy policy until a certain specific number rises to 2%,” he continued, though he noted the weak yen had also exercised a dampening effect on consumption.

“I don’t expect the weak yen to have significant impact on prices, judging from the effects of the pass-through of forex moves. But the timing of policy adjustment could quicken if the upside risk to price strengthens more than bank officials expected."

The inflation forecast within April’s Outlook Report incorporated the impact of the weak yen, but still anticipated core-core CPI at 1.9% for both fiscal 2024 and 2025, unchanged from three months ago, he noted. Core-core CPI provides a good indication of second-order and underlying inflation and is closely watched by policymakers, Sekine explained.

The BOJ remains “opportunistic” regarding the conduct of monetary policy, the former chief economist said, adding it will continue to pare back very accommodative policy so long as price conditions and underlying inflation continue to improve.

“The BOJ judged that the current monetary condition is very accommodative in terms of real interest rates and the Taylor Rule, and made it clear that it will adjust the degree of easy policy, depending on developments of economic activity and prices in addition to financial conditions,” Sekine said. (See MNI INTERVIEW: BOJ Policy Shift Closer)

YEN NOT CONCERNING

The fiscal 2024 and 2025 inflation forecasts showed that the BOJ doubted whether the output gap will push inflation higher, which illustrated the Phillips Curve is flattening, with the expected inflation rate currently estimated at between 1-1.5%, he continued.

The Phillips Curve is not determined by the output gap alone and is more influenced by the expected inflation rate.

While Sekine stressed the importance of the impact of a weaker yen on risks to prices, he dismissed recent reports by private economist predicting the BOJ could lower the degree of easy policy or raise interest rates just to prevent currency depreciation as “ridiculous,” adding that “the BOJ doesn’t have such a view.”

He argued the weak yen had somewhat hit private consumption and higher interest rates will put further downward pressure on consumers, which in turn will lower prices.