MNI INTERVIEW: Ex-BOJ’s Sekine Sees YCC Adjustment in June

The Bank of Japan is likely to raise its target for the 10-year bond yield as early as its June 15-16 meeting given that it can point to a rise in trend inflation rate above 1% from zero percent, a former BOJ chief economist told MNI.

The BOJ could raise its target rate to around 1% from about 0% and widen the acceptable yield range to between plus and minus 100bp at the policy-setting meeting, said Toshitaka Sekine, professor at the School of International and Public Policy at Hitotsubashi University, and former head of the Institute for Monetary and Economic Studies at the central bank.

Sekine added that the BOJ should make clear in advance that it will adjust the long-term target due to changes in the natural rate of interest as the trend inflation rate has tracked above 1%. Raising the target, however, does not signify policy tightening, he noted.

“It will be very complicated to explain, but it will be sufficient for the BOJ to point out that the trend inflation rate rose above 1%, which will justify the rise of the long-term target, even though it stayed at about 0% for a prolonged period,” he said.

TREND INFLATION

The April Outlook Report’s forecasts clearly showed the BOJ believes trend inflation rate has risen close to 2%, though the Bank is still not confident it will achieve its 2% target on a sustainable basis.

Sekine said that the natural rate of interest on a nominal basis is estranged from the current long-term policy target, judging from economic fundamentals.

“It is unreasonable for the BOJ to keep the long-term policy target at about 0% on the basis that the natural rate of interest in real terms is near 0%, but the trend inflation rate is not 0%,” Sekine said.

He continued, “Suppose that the real natural rate of interest has remained near 0% and trend inflation has risen to 1%, then the natural rate of interest in nominal terms is around 1%. This means that the target of the YCC needs to be adjusted to 1%. If the BOJ is not confident about the level of the nominal natural interest rate, it needs to widen the range of the target to incorporate uncertainty.”

Governor Kazuo Ueda has clearly stated that the BOJ will maintain its YCC framework until it achieves its 2% price target (see: MNI BRIEF: BOJ Ueda: Continuing With YCC Appropriate Now). The Bank, however, is open to changing the 10-year yield target, Sekine pointed out.

The Federal Reserve policy-setting meeting scheduled for June 13-14 will also open a window to allow the Bank to raise its target, Sekine said. “If the BOJ took policy action before the Fed’s meeting, the impact of [its] action could be twisted or distorted, depending on the Fed’s policy decision,” he said.

AMAZING INFLATION VIEWS

Sekine called the inflation forecasts in the Outlook Report “very amazing,” noting the BOJ expects to reach its 2% price target in terms of the first perspective that the BOJ assesses, the aforementioned economic and price situation.

“As a result, the BOJ didn’t change the policy framework, judging from the second perspective, amid the heightened uncertainties,” he explained.

The BOJ uses the two-perspective approach to judge its monetary policy. Its first perspective examines economic activity and prices one to two years in the future and whether the outlook deemed most likely by the BOJ follows a path of sustainable growth under price stability. The second perspective involves a longer term view of the various risks most relevant to the conduct of monetary policy, aimed at realising sustainable growth under price stability.

Under Ueda's "risk-management approach" to policy, the governor has stressed that the risks of missing the 2% inflation target due to premature tightening are greater than those of seeing excessive price rises due to a delayed tightening.