MNI INTERVIEW: BOJ May Be Confident Of 2% Target in April

The Bank of Japan's confidence in the achievement of its 2% inflation target could firm significantly as soon as April, paving the way for the new governor to consider an exit from yield curve control, a former BOJ chief economist said.

Toshitaka Sekine highlighted the real export index, "amazing" consumer price index (excluding fresh food and energy) readings, and regular worker wages, as key data suggesting the conditions for achieving the 2% price target may be established, casting doubt on the longevity of the seven-year-old policy of yield curve control (YCC) that caps the 10-year bond yield.

“I cannot rule out the view that the 2% target may be achieved if the momentum for the three sets of data remains solid over the coming months,” Sekine, now a professor at the School of International and Public Policy at Hitotsubashi University, told MNI.

Sekine added that even if the environment for achieving the 2% price target was established, whether or when it would lead to change in policy depends on whoever becomes the next governor. Deputy Governor Masayoshi Amamiya, who has formulated the BOJ's monetary policy under Governor Haruhiko Kuroda, is viewed as a frontrunner for the position. (See MNI POLICY: New BOJ Gov Must Keep Rates Low, Ensure Recovery)

“The timing of policy tweaks depends on whether the new governor is more optimistic about the outlook for the economy and prices or cautious,” he said.

He said that if the BOJ was confident about hitting the 2% price target, it should should scrap YCC and leave the 10-year yield to be determined by markets, with the central bank refocusing attention on its traditional role of controlling the overnight call rate.

“Widening the range of the 10-year interest rate before scrapping YCC may be an option. The current economic and price conditions are tolerating the BOJ to consider tweaking monetary policy,” Sekine said.

"AMAZING" DATA

Sekine reassessed his view on the likelihood of the 2% target being achieved after recent inflation data. “I had thought the 2% price target would not be achieved until the September CPI data. But I changed my view as the key CPI data in October and November were amazing,” he said.

“In addition, the real export index and full-time employees’ scheduled cash wages didn’t fall, indicating that the 2% price target may be achieved,” he said.

Sekine was also encouraged by the price change distribution for CPI items, which showed that the thickness of its right tail had increased, indicating an increase in the number of items for which prices have risen. “People’s norms might have changed and households’ tolerance for price rises has increased,” he said.

INFLATION OUTLOOK

Sekine is closely watching the BOJ's forecasts to gauge their confidence in moving towards the achievement of the 2% price target.

“As BOJ watcher, I think the BOJ will make it clear whether the current view on economy and prices is right or wrong. The BOJ’s view on economy and prices is clearly reflected in the Outlook Report," he said, adding there was no evidence that view was wrong.

“If the BOJ was confident about a stronger-than-expected scenario in April, the bank will raise the key inflation rate forecast to 1.7% or 1.8% (from 1.6%), which indicates the 2% target comes into sight,” the former chief economist said.

“The biggest message from the Outlook Report (released in January) is that the BOJ didn’t raise the forecast for CPI (all items less fresh food and energy) in fiscal 2024 from 1.6% made in October.” “The 1.6% forecast clearly showed that the BOJ wasn't confident of achieving 2% price target in January,” he said.

Sekine added that the baseline scenario was shaped by the latest Outlook Report, which forecast a deceleration in overseas economies and that Japan’s prices will not rise.

“I don’t think the baseline view is wrong. But looking ahead, the BOJ can show a more bullish view towards April if the underlying trend of prices, wages and the real export index remain solid,” Sekine said.

He added the BOJ could highlight upside risks to economy and prices and overseas economies, especially the U.S., should growth not worsen as much as the bank estimates.