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--Ex-BOJ Chief Economist Warns of Narrow Path Amid High Yen Risk
By Hiroshi Inoue
TOKYO (MNI) - The Bank of Japan's recent decision to stop publishing the
estimated timing of hitting the 2% inflation target will make it easier for the
BOJ board to debate the normalization of aggressive easing and ways to mitigate
its side-effects without causing market speculation, Kazuo Momma, a former BOJ
chief economist, told MNI.
But Momma also said in an exclusive interview with MNI on Thursday that the
BOJ needs to state more clearly what types of side-effects will prompt the board
to reduce the scale of easing before starting the process of full normalization.
"The uncertainty is high as to when the BOJ can achieve the 2% price
target. The BOJ is not confident about hitting the target," he said.
"The board now sees downside risks to prices are higher than upside risks.
As a result, the BOJ has dropped the timeframe for the 2% price target."
But he added that the flip side is that the BOJ can assess both the
benefits and costs of the aggressive easy policy "in a balanced manner" now that
it is not under time pressure to lift low inflation to a stable 2%.
At its April 26-27 policy meeting, the BOJ board decided in an 8-to-1 vote
to maintain its cautiously stimulative monetary easing stance under the yield
curve control framework while dropping its estimate on when it can achieve the
increasingly evasive 2% inflation target.
If the BOJ maintained the timeframe for achieving the 2% price target, the
board would not be able to freely debate the normalization of the policy, said
Momma, who left the central bank in 2016 at the end of his term as executive
director. He is currently executive economist at Mizuho Research Institute.
Until September 2016, when the BOJ switched its policy target to the shape
of the bond yield curve from the total sum of cash available for economic
activity, it had aimed to achieve the 2% price target at any cost by the
published timeframe. The BOJ has since relaxed its stance and now takes the
side-effects of prolonged large-scale easing into consideration, Momma
"Looking ahead, the biggest challenge facing the BOJ is to figure out how
to assess and articulate the side-effects of easy policy and justify policy
adjustments, in order to mitigate the side-effects," he said.
He added that the BOJ has not yet identified what types of side-effects at
what magnitude would put the financial system at great risk and how the bank
--CONVINCING CRITERIA NEEDED
Momma noted that the summary of opinions expressed at the BOJ's April 26-27
policy meeting showed that the board was watchful of the side-effects of the
However, the summary didn't show any board members calling for the need to
adjust policy now to mitigate its side-effects. This is because the BOJ hasn't
specified "decisive criteria" for dealing with the side-effects, Momma said.
Since the BOJ has no clear deadline for achieving the 2% price target, the
board can debate how it should normalize the easy policy in the future, without
worrying too much about causing speculation as to when the bank will begin
unwinding the easing, he said.
However, he added that it may take considerable time before BOJ officials
can reach consensus on what will trigger the normalization of the easy policy.
BOJ officials are paying attention to both signs of overheating where
financial imbalances build up and the stability of the financial system is
impaired, and signs of a gradual pullback, in which financial institutions'
profit environment deteriorates and their financial intermediation functioning
Momma also said BOJ officials don't want to continue easing on the current
scale in the next five years but that at the same time they don't wish market
participants to regard fine-tuning as an exit from easing, which means the way
that the BOJ can justify the move toward normalization is a "narrow path."
If the BOJ's move to mitigate the side-effects is interpreted to mean that
it is moving toward an exit of easy policy or toward tightening, it would cause
an unwanted yen rise or a spike in long-term interest rates, Momma warned.
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