MNI INTERVIEW: Ex-BOJ Offl: BOJ To Lift 10-Yr Rate Above 0.2%

--Ex-BOJ Hayakawa: Forward Guidance To Get Wakatabe To Agree

--Ex-BOJ Hayakawa: Forward Guidance Wouldn't Restrict Rate Hikes

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is likely to push up the 10-year Japanese

government bond yield gradually above +0.2% as vaguely worded "forward guidance

for policy rates" would not stop the bank from raising rates, a former senior

BOJ official told MNI in an exclusive interview.

     "The forward guidance is created to get (Deputy Governor Masazumi)

Wakatabe, a reflationist  board member, to agree on the policy statement and

also to discourage foreign investors from expecting a stronger yen from the

statement," said Hideo Hayakawa, a former BOJ chief economist and currently

senior executive fellow at Fujitsu Research Institute.

     He was referring to the statement entitled "strengthening the framework for

continuous powerful monetary easing" issued after the July 30-31 meeting, in

which the BOJ said it would make its long-term interest rate target and asset

purchases more "flexible," allowing the flat yield curve to steepen slightly to

help reduce the side-effects while making prolonged easing more sustainable.

     "Since the board revised down its median forecast for inflation (at the

meeting), it could not say it was weakening the degree of easy policy," Hayakawa

said, explaining why the BOJ had to say it was strengthening its policy while

many see the move as laying the groundwork for scaling back the degree of easing

to make the policy framework more sustainable and head off excessive investment

and a further squeezing of profit margins for lenders.

     --INCOMPREHENSIVE STATEMENT

     Hayakawa said the BOJ was trying to give the impression to markets through

what he called an "incomprehensible and ambiguous" statement that the BOJ was

strengthening the easy policy.

     Under the forward guidance, the BOJ said it "intends" to maintain the very

low levels of short- and long-term interest rates "for an extended period of

time," taking into account uncertainties over growth and inflation including the

effects of the sales tax hike scheduled in October 2019.

     But Hayakawa pointed out the BOJ didn't say how low would be low for

interest rates, and that the word "intends" would not mean it would refrain from

raising rates.

     "The forward guidance usually says the policy stance will be maintained

until when," he added.

     --STEALTH RATE HIKES

     Hayakawa also said the forward guidance would allow the BOJ to conduct

"stealth 10-year rate hikes."

     The statement didn't refer to the bank's new allowance for the same "around

zero" target for the long-term interest rate but Governor Haruhiko Kuroda told

reporters after the meeting last week that the BOJ was now allowing a wider

trading range of +0.2% to -0.2% for the 10-year JGB yield, double the previous

unofficial range of +0.1% to -0.1%.

     The expanded range should help recover the function of the tepid JGB market

and make large-scale monetary easing more sustainable, Kuroda said.

     "The statement didn't indicate the +0.2% to -0.2% range, which means the

BOJ can raise the 10-year rate to +0.4% or +0.5% without issuing a new

statement," Hayakawa said.

     He said the BOJ has already tasted success in "stealth unwinding" of

massive asset purchases by halving the scale of its JGB purchases to around Y40

trillion a year since switching the policy target to the yield curve from

amounts of cash in the financial system in September 2016, while maintaining the

reference to the previous target of buying JGBs at an annual pace of "around Y80

trillion" in each policy statement issued since then.

     Hayakawa was one of the six executive directors at the BOJ supporting the

governor from March 2009 to March 2013 after serving as the chief economist for

the central bank for about six years to 2007.

--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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