MNI INTERVIEW: Ex-BOJ Momma: Change Criteria for Policy Shift

-Ex-BOJ Momma: Hard To Fine-Tune Easing Under Current Framework

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan should change the conditions for a policy

shift so that it can mitigate the side-effects of large-scale monetary easing

more smoothly, Kazuo Momma, a former BOJ chief economist, told MNI.

     The BOJ has said it will make policy adjustments in response to

developments in growth, inflation and financial conditions, but it should

instead use the output gap, banks' lending and financial trading functions and

the degree of fiscal discipline as the key barometers, he said in an interview

with MNI Thursday.

     Japan's output gap, unemployment rate, corporate profits and stock prices

have all improved from five years ago when the BOJ began aggressive easing, but

easing has been reinforced for the past five years, which doesn't make sense in

a normal situation, he said.

     --PROLONGED EASING

     The BOJ will have to maintain its easing stance for a prolonged period

because its top policy priority is to anchor 2% inflation, said Momma, who left

the central bank in 2016 at the end of his term as executive director.

     "Even if consumer prices rise somewhat and real interest rates fall, the

BOJ must maintain the easy policy. The current policy framework has a mechanism

of maximizing the effects of easy policy when real interest rates fall," Momma

said. He is currently executive economist at Mizuho Research Institute.

     But he added that the BOJ must pay a great attention to the side-effects of

large-scale easing, particularly on the financial system, as it has committed

itself to maintain the easing stance until after 2% inflation has been anchored.

     --JUSTIFYING FINE-TUNING

     "Under the existing policy framework, it is very difficult for the BOJ to

justify fine-tuning the easing before the 2% target is achieved, because the

side-effects of easy policy may not be so tangible," Momma said.

     If the economy slumps or the yen rises after the BOJ reduces the degree of

easing in "fine-tuning," the BOJ will come under fire even if its action dose

not directly cause those changes, he said.

     But he also said the BOJ should be able to start unwinding easing without

drawing too much public criticism if there is a clear prospect that the core CPI

will rise in a range of 1.5% to 2% on year within six to 12 months.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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