MNI INTERVIEW:BOJ Must Defend Yields Despite Price Surge-Masai

Higher prices hitting some businesses do not warrant any policy adjustment by the Bank of Japan, which should curb undesirable rises in interest rates via its yield curve control framework even if inflation briefly passes 2%, former BOJ board member Takako Masai told MNI.

“The policy will be more effective if prices or inflation expectations rise. That’s the whole point of yield curve control,” Masai, director at SBI Financial and Economic Research Institute, said in her first media interview since she left the BOJ in June 2021, ”Under existing conditions, unwinding easy policy is unthinkable.”

While the BOJ should be mindful of the effect of a jump in energy prices on businesses, especially in Japan’s regions, Masai stressed that yield-curve control is designed precisely to keep rates down when consumer price inflation rises.

Inflation could rise to close to 2% in or after April as downward pressure from cheaper mobile phone charges wanes, despite the wind-down of the Go To Travel campaign, she said. But the output gap remains in negative territory, Masai added.

“High energy prices are having a negative impact,” she said, “There is no medicine that fully takes effects without any side-effects, so there are people who are concerned about the side-effects of easy policy.”

LONG-TERM EXPECTATIONS

But while the BOJ must consider the costs of prolonged easy policy, she stressed that it must manage monetary policy in an appropriate manner in line with its targets.

“It is unlikely that the BOJ will adjust its policy framework,” she said, though she acknowledged that investors will scrutinise how BOJ policy makers assess price moves from April. Officials will have to look carefully for signs inflation is feeding through into corporate price setting and wage claims, she said.

Masai noted that the BOJ sent a strong message that it maintains its commitment to expand the monetary base until inflation exceeds 2% in a sustainable manner with the announcement of a fixed-rate bond buying operation. Long-term inflation expectations do not rise easily, she noted.

“The achievement of 2% target in a stable manner in line with the BOJ’s target isn’t the same as competing in a sport, like the high jump,” she said, “Even if CPI touches 2%, it would not be sufficient and would not result in policy adjustments.”

Financial market volatility will rise this year as the Federal Reserve tightens, Masai said, adding that investors will focus on whether higher U.S. rates succeed in dampening inflation.

““If the Fed’s policy adjustments fail to curb rising prices properly , it might be disruptive to global financial markets,” Masai warned.