MNI INTERVIEW: Ex-BOJ's Maeda Sees Terminal Rate Above 1%

The Bank of Japan could eventually raise its overnight rate above 1%, about double the expectations of private economists, assuming it can stabilise inflation at around 2%, a former BOJ chief economist and executive director in charge of monetary policy told MNI.

While the BOJ is unlikely to increase its policy rate in the next few months, it could announce a reduction in the scale of government bond purchases as early as at its July meeting if it considers that this would improve market functioning without putting strong upward pressure on long-term rates, Eiji Maeda, who left the Bank in 2020 and is now president of the Chiba-Bank Research Institute, told MNI.

Any depreciation of the yen to around 160 to the dollar could also somewhat accelerate BOJ tightening by boosting import prices and inflation, Maeda said.

“If this occurs together with second-round inflation it could keep inflation above 2% for a prolonged period. This would prompt a rate hike after the middle of the year and quarterly rate hikes next year, depending on conditions,” Maeda said.

However, he added, BOJ policy moves will not in themselves be aimed at supporting the yen.

NEUTRAL RATE

BOJ estimates of the real neutral rate of interest between -1% and +0.5% would imply a nominal neutral rate of 1-2.5% if sustainable 2% inflation is fully achieved, Maeda said.

He contrasted this with forecasts of the policy rate by private economists over the coming years, which are for around 0.5% at most, which would still be close to the highest level in the nearly 30 years.

The BOJ raised its overnight rate to zero last month, but the last time it was increased to 0.50% was in February 2007.

“If it sees a higher probability of achieving the 2% price target in a stable and sustainable manner, the BOJ will raise the policy interest rate to 0.25% around the autumn,” Maeda noted. (See MNI POLICY: Oct Price Revisions Key To Further Rate Hikes)

While the BOJ’s Tankan survey indicates that companies expect inflation of above 2%, investors and economists are more pessimistic, projecting prices to rise by around 1.25%, he said.

“The BOJ is monitoring whether the underlying inflation trend is moving towards 2%, looking at overall wage hikes, services prices and the expected inflation rate,” Maeda added. (See MNI POLICY: April Services Data Key For Further BOJ Rate Move)

Services prices are now rising almost quickly enough to give the BOJ confidence of achieving its 2% target, he said.

“The probability of achieving the 2% price target will increase further around autumn, unless the global economy falls into serious recession.”

The BOJ could also reduce the scale of its purchases of JGBs by about JPY1 trillion from around JPY6 trillion under the current policy directive, Maeda said.

“It is unlikely that the BOJ will change the policy directive to clearly reduce the scale of bond buying in April and June but it could do so in or after July,” he said.