MNI INTERVIEW: BOJ's Underlying Gauge Downplays Inflation
MNI (LONDON) - The Bank of Japan’s new emphasis on underlying inflation risks underestimating actual price moves, a former BOJ executive director told MNI, calling on the Bank to re-evaluate the metric and to accelerate policy normalisation.
“The bank seems to be using [weak] underlying inflation as a tool to slow policy normalisation,” Kenzo Yamamoto, representative for KY Initiative who left the BOJ in 2012 and who has previously called for a faster exit from easy policy, said in an interview.
While the BOJ excludes fresh food and energy from its underlying CPI calculation, these items are now in a clear upward trend, despite a period of stability from the 1990s to the first half of the 2000s. (See MNI POLICY: Weaker Capex Plans To Pressure BOJ Board)
“It isn’t appropriate for the bank to assert that overall price moves around 3% for nearly three years aren’t underlying CPI, given the fact that those prices are affecting private consumption,” said Yamamoto, pointing to stronger trends shown in government real wage data calculated using nominal total cash earnings minus prices excluding imputed rents, but including fresh food and energy.
BOND BUYING IMPACT
Yamamoto also repeated calls for the BOJ to review the impact of its bond purchases on fiscal discipline and to reduce the size of its JGB portfolio back to the pre-easy policy level of JPY125 trillion. (See MNI INTERVIEW2: BOJ Should Cut JGBs By JPY470 Trln – Yamamoto)
The impact of the BOJ’s interest rate hikes on market rates and economic activity will be limited so long as commercial banks hold huge excess reserves, making it difficult to manage monetary policy flexibly, he said.
In its Review of Monetary Policy, the BOJ said that JGB buying is not aimed at supporting fiscal financing, but Yamamoto argues that massive bond buying has loosened fiscal discipline.
Anyone wishing to judge whether BOJ policy has reduced fiscal discipline has only to ask whether or not it has made it easier or more difficult for the government to issue bonds, he said, concluding: “The answer is very clear.”
Yamamoto leans towards the view that the BOJ is likely to raise the policy to 0.75% by July, though some market players are betting that the next rate hike will be delayed until October.
“The Japanese economy has been strongly influenced by the U.S. economy, so unless the U.S. economy worsens significantly, the Japanese economy will be alright,” he said, though, despite his preference for tighter policy, Yamamoto acknowledged downside risks to the economy, and particularly to private consumption and capital investment.