MNI INTERVIEW: Ex-BOJ Economist Defends Easy Policy, Yield Cap

A recent former chief economist of the Bank of Japan defended its easy monetary stance, which is under attack from other former central bank officials as well as lawmakers, telling MNI current policy settings were appropriate given downside risks to the economy.

Toshitaka Sekine said that the BOJ had to guard against a possible deeper global slowdown as well as wait for more evidence of wages growth, and that it was not the central bank’s job to address concerns related to the weakening yen.

“The BOJ welcomes the appearance of second-round effects as the bank is willing to boost inflation expectations. That’s a big difference from other central banks, such as the Federal Reserve and the European Central Bank,” Sekine, who left the BOJ in 2020 and is now a professor at the School of International and Public Policy at Hitotsubashi University, said in an interview on Thursday. “BOJ officials see that it is natural for businesses to transfer high costs to retail prices, even if households suffer from high prices.”

The BOJ is right to cap the yield on 10-year government bonds at 0.25% under its yield control policy, said Sekine.

CRITICISM

His comments came amid mounting speculation that the BOJ will raise or adjust the cap at its meetings in June or July, to prevent further depreciation of the yen. Other former BOJ economists have called for a change to the easy policy stance, arguing that it allows inefficient firms to survive, detracting from productivity, and that too weak a yen erodes corporate profits and household purchasing power. (see MNI INTERVIEW: BOJ Should Review 2% Target-Ex Senior Official)

Sekine said that the world economy might weaken further as the Fed hikes interest rates and Chinese output slows, and that the International Monetary Fund’s 3.6% already-downgraded global growth forecast may prove too optimistic.

“Policymakers should be focused on downside risks to the economy. I cannot draw a rosy picture that the global economy will pick up and that Japan’s economy will also recover smoothly, allowing the BOJ to adjust its easy policy,” Sekine said.

WEAKENING YEN

While the BOJ has been right to note that rapid moves in the yen have been excessively fast, it should not comment on whether the exchange rate is at the right level for the economy, he said, adding nonetheless that there is no clear evidence that this has become estranged from fundamentals. Other Asian currencies are also falling on the back of rising U.S. interest rates, he noted.

Criticism of the BOJ from lawmakers and the media blaming the fall in the yen for rising prices is misguided, given that inflation is being driven by global commodity markets, said Sekine, adding that easing the pain of more expensive inputs should be the job of the government and not the central bank.

Inflation expectations will not rise easily in Japan without a strong rise in wages amid a tight labour market, and the BOJ should wait until it sees this before adjusting policy, he said.

“If wage hikes pick up pace considerably by July, the BOJ could revise up the median forecast for real economic growth in the July Outlook Report. The focus will be on how much regular workers’ scheduled earnings rise,” Sekine said.

During Japan’s long period of deflation, keeping prices unchanged became seen as the norm, prompting companies to comply lest they be regarded as acting unfairly and depressing inflation expectations. Bigger wage increases are needed to break this cycle, Sekine said.