MNI INTERVIEW: Ex-BOJ's Momma Sees June Hike, 1% Neutral
MNI (TOKYO) - The Bank of Japan is likely to raise the interest rate 25 basis points to 0.75% at the June 16-17 meeting, earlier than anticipated, to create policy space should it need to ease once it achieves the 2% price target, a former BOJ chief economist told MNI, suggesting a 1% neutral rate was plausible.
While the Bank would prefer to hike every six months, it will also want to avoid clashing with the upper house election likely to be held before the July 30-31 meeting, noted Kazuo Momma, now executive economist at Mizuho Research and Technologies.
Markets have not fully priced in a 25bp increase until October, following the BOJ's hike in January.
“The BOJ’s mandate is price stability, so the bank cannot justify no rate hike, given that [annual core] inflation stays at around 3% for almost three years,” he said. “At the same time, the bank is having difficulty raising the rate as consumers are suffering amid high living costs. The Bank must raise the policy rate in a balanced manner.”
Momma, who left the BOJ in 2016 and predicted January’s 25bp increase in November, added the Bank struggled to find an appropriate interest-rate level consistent with the 2% inflation “norm” through gradual rate hikes. (See MNI INTERVIEW: BOJ Jan Hike Most Likely, But Yen Crucial)
EVOLVING NORMS
While the norm will determine medium- to long-term inflation expectations, Momma has yet to see significant evidence that this level has completely changed, pointing to services prices that have failed to rise in line with the Bank’s 2% target. “The probability isn’t high that the norm exceeds 2%, such as rising to 2.5% or 3%,” he said.
Recent CPI data showed services inflation excluding imputed rents rose 1.9%, close to the Bank’s 2% target, but this was driven largely by dining and accommodation alongside foodstuffs, lighting and heating expenses, he explained, noting wider services prices – a key BOJ focus – also rose 1.4% y/y.
The BOJ does not understand how the norm evolves and it must raise the policy rate gradually to gauge the impact on expectations, he explained.
The need to hike the policy rate above 1% should also weaken as the upward pressure on prices from cost-push wanes and corporates adapt, he said. “The risk isn’t big that the medium- to long-term inflation expectations deviate from 2% and rise above 2%,” Momma argued, noting the BOJ likely held the same view, which would drive gradual hikes.
LOWER BOUND NEUTRAL
Momma argued chances of a 1% neutral rate – the lower bound of the BOJ’s 1-2.5% estimate – were high, and the Bank will likely hike to that level by H1 2026 if it commits to 25bp increases every six months, as some market commentators expect.
However, financial market volatility amid heightened uncertainty stemming from the U.S. economy and inflation could derail monetary policy, he warned, pointing to yen or Nikkei 225 risk. The dollar-yen pair could trade within a JPY10 range depending on U.S. economic developments, he warned.
But Momma downplayed the recent spike in 10-year JGB yields, noting 1.5% remained low given Japan’s underlying inflation had hovered around 3% for almost three years. “It isn’t strange for the yield to move toward 2%,” he continued. (See MNI POLICY: BOJ Shrugs Off JGB Yields, Yen Strength)