MNI INTERVIEW: BOJ Policy Shift Would Be A “Miracle” – Kataoka

The Bank of Japan is unlikely to shift policy under a new Governor until at least the middle of the 2023 fiscal year, and even then it would be a “miracle”, former board member Goushi Kataoka told MNI.

The dovish former official said the BOJ would likely have to raise its core Consumer Price Index forecast for the next two fiscal years, maintain bond buying to curb yields, and that policymakers would be unmoved by a weak yen.

Immediate shifts away from the Bank’s easy policy were unlikely to be heralded by the arrival of a new Governor after the retirement of Haruhiko Kuroda in April. (See MNI STATE OF PLAY: BOJ On Hold For Years As MOF Buys Yen)

“If the governor and deputy governors are replaced, then board members’ way of thinking will change but immediate and rapid policy change is unlikely. The BOJ will cautiously watch market moves after shifting its policy easing bias to a neutral one,” said Kataoka, now chief economist at PwC Consulting.

“Judging from the BOJ’s way of thinking, it will cautiously implement policy adjustments. It is like learning how to ride a bicycle without the training wheels. The BOJ will remove one and see whether it falls,” he said. The decision to extend the financing facility for small firms at the Bank’s September meeting was indicative of its “cautious attitude”.

The Bank has signalled it will maintain easy policy until its 2% inflation target is reached in a stable and sustainable manner. But policymakers could move to the next phase and consider policy adjustments should inflation stabilise at 2% and be viewed as credibly remaining at that level by the public and officials, he said.

Establishing stable inflation of 2% without global price influences was viewed as important. “I strongly hope that situation is available next year. But I think it is very difficult and adjusting the forward guidance will be the most one can do,” he said.

FINESSING FORECASTS

Kataoka said the Bank would likely raise its core CPI forecasts as inflation hits 3% this fiscal year and 2% next fiscal year, assuming there is no global recession and wages rise at a reasonable pace.

“The BOJ board’s median forecast for the inflation rate this and next fiscal year will be revised up judging from the recent price moves and ongoing pass-through,” he said.

He wouldn’t elaborate on specific numbers given the uncertain outlook but said it “wouldn’t be strange” if the median forecast was revised up 0.5 percentage point for both years given the ongoing pass-through of price increases.

Policymakers will review core CPI forecasts in October, and July’s median estimates for inflation of 2.3% and 1.4%, respectively, will likely be revised higher.

“The key issue is whether the BOJ can change its baseline price view, where the year-on-year rise will slow next fiscal year,” he said.

He said there was a small chance price rises will stay above the BOJ’s forecast.

“The global economic slowdown and its degree and timing hold the key for Japan’s prices to rise. If the slowdown isn’t deep and its timing is delayed, Japan’s core CPI could be stable around 2% for a prolonged period,” he said.

Kataoka said if the BOJ was confident of its outlook for higher inflation then that would lead to policy adjustments.

“I personally have no clear-cut answer whether core CPI will slow next fiscal year as the BOJ has predicted or whether the recent price moves will cause wage hikes and then pass-through will be prolonged,” he said.

YEN PRESSURE

He said the Ministry of Finance’s willingness to intervene to support the yen will be tested as the currency is pressured by expectations for further U.S. rate hikes.

“Japan’s authorities can’t help buying time while focusing on when and how the rise in U.S. interest rates peaks out. A weak yen will not force the BOJ to adjust policy,” Kataoka said.

He said the BOJ will continue to prevent interest rates from rising by maintaining its fixed-rate bond buying operation without limit.