MNI INTERVIEW: BOJ Must Strengthen Forward Guidance: Ex-Offc'l

The Bank of Japan must strengthen its forward guidance with the addition of a timeframe and target it directly to the 2% price target in order to boost the effectiveness of monetary policy, a former BOJ chief economist has told MNI.

"Current BOJ forward guidance is meaningless" as it doesn't define how long the policy should remain in place, Kazuo Momma, now executive economist at Mizuho Research Institute, said in an exclusive interview Wednesday.

Momma said, however, that the BOJ need not pledge to keep the long-term interest rate unchanged until it hits the 2% target. The BOJ is targeting both the short-term and the 10-year interest rates, but flexibility in their longer-term target could open other possibilities on the yield curve.

Then, the BOJ could incorporate its stance over JGB buying into the policy statement, outlining that it would like to prevent an excessive decline in super long-term yields.

"If the BOJ continues to keep the 10-year policy rate at around zero percent, it will restrict movement of longer-end bond yields. Thus, the BOJ should consider widening the range of 10-year bond yield to a range of plus and minus 30 or 40 basis points at around zero percent," Momma said.

For additional support to the economy and the potential growth rate, Momma said the BOJ could build on the existing scheme, the 'Fund-Provisioning Measure to Support Strengthening the Foundation for Economic Growth', which was extended last year by 12 months and provides loans at an interest rate of 0.1%.

INFLATION OUTLOOK

Momma said that the BOJ board's median forecast for the inflation rate in fiscal 2023 to be released in April will be far below 2%.

"This means that the 2% target will not be achieved during the next three years and the BOJ needs to ensure flexibility of easy policy," Momma said.

ETFS

Momma said the BOJ needed to amend its continuing Exchange Traded Funds program, moving the policy to a backstop position rather than the current format of ongoing purchases.

So far this month, the Bank's market division has purchased ETFs on three occasions - in January as well as in November and December despite the strength of the Nikkei stock index – all unnecessary purchases according to Momma, who has expressed similar views before.